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Full text of "An analysis for capital expenditure decisions at a Naval Regional Medical Center."

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NAVAL POSTGRADUATE SCHOOL 

Monterey, California 




THESIS 





AN ANALYSIS 
FOR CAPITAL EXPENDITURE DECISIONS 
AT A NAVAL REGIONAL MEDICAL CENTER 








by 












Martin Edward Doyle 


III 










December 1981 








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Approved for public release, distribution unlimited 



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4. TITLE mr>d Ju»«/M»; 

An Analysis for Capital Expenditure 
Decisions at a Naval Regional Medical 
Center 



7. AuTmORi'«> 



Martin Edward Doyle III 



• PERFORMING ORGANIZATION NAME ANO AOORESS 

Naval Postgraduate School 
Monterey, CA 93940 



I. CONTROLLING OFFICE NAME ANO AOORESS 

Naval Postgraduate School 
Monterey, CA 93940 



READ INSTRUCTIONS 
BEFORE COMPLETING FORM 



S. RECIPIENT'S CAT ALOG NUMBER 



5. TYPE OF REPORT ft PERIOO COVERED 

Master's Thesis 
December 1981 



S. PERFORMING ORG. REPORT NUMBER 



• ■ CONTRACT OR GRANT NUMBERS 



10. PROGRAM ELEMENT. PROJECT TASK 
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12. REPORT DATE 

December 1981 



13. NUMBER OF PAGES 

125 



II MONITORING AGENCY NAME * AOORESS«/ SffeMHI Item Controlling Office) 



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is. supplementary notes 



If. KEY WORDS C«iilnu« of» roweroe tidm II nmcfmrr end Identity my tloet ntmteer) 

hospital financing, capital budgeting, budgeting, cost /benefit 
analysis, benefit /cost analysis, non-profit capital investments 



20. ABSTRACT (Continue on rorormo aide It neeeeoewy an* Identity »r »ioc* mummer) 

This thesis addresses the problem encountered by non-profit medical 
centers in formulating budgets for capital expenditure decisions. 
Using Naval Regional Medical Center (NRMC) San Diego as an example 
a benefit/cost model was developed. The costs used in the authors 
analysis were those that were considered to be relevant and in- 
cremental. The benefits derived were a composite weighting of four 
factors determined from a survey of the chiefs of service at NRMC 



DD 



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EDITION OF 1 MOV •• IS OBSOLETE 

S/N 102-014- ««0t l 



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SECURITY CLASSIFICATION OF TNIS PAGE (9hen Dmlo Entered) 



tltui*T» eL*Ht>'C*tioii 90 Twit »4«»f.— r>»»« f «••»«• 



(20. Abstract Continued) 

San Diego. These four factors are utilization rate of equipment, 
life-saving potential, greater dependability of service and 
better diagnosis and evaluation of patient needs. The composite 
rating was then extended over the estimated economic life of the 
equipment and divided by the net cost to determine an index of 
service. Finally, equipment proposals were ranked by index of 
service. This model was determined by the author and senior 
hospital administrators to be very useful in tentative ranking 
of equipment proposals. 






DD Form 1473 
mt 1 Jan 73 
S/N 0102-014-6601 



UNCLASSIFIED 



2 l*CU««»» CLAMI*lCA*10l» O* T »«l« *•••*■*•■ 0««« !»#•»•*• 



Approved for public release, distribution unlimited 



An Analysis for Capital Expenditure Decisions 
at a Naval Regional Medical Center 



by 



Martin Edward Doyle III 
Lieutenant Commander, United States Navy 
B.S., United States Naval Academy, 1970 



Submitted in partial fulfillment of the 
requirements for the degree of 



MASTER OF SCIENCE IN MANAGEMENT 



NAVAL POSTGRADUATE SCHOOL 
December 1981 



ABSTRACT 

This thesis addresses the problem encountered by 
non-profit medical centers in formulating budgets for capital 
expenditure decisions. Using Naval Regional Medical Center 
(NRMC) San Diego as an example a benefit /cost model was 
developed. The costs used in the authors analysis were those 
that were considered to be relevant and incremental. The 
benefits derived were a composite weighting of four factors 
determined from a survey of the chiefs of service at NRMC San 
Diego. These four factors are utilization rate of equipment, 
life-saving potential, greater dependability of service and 
better diagnosis and evaluation of patient needs. The 
composite rating was then extended over the estimated 
economic life of the equipment and divided by the net cost to 
determine an index of service. Finally, equipment proposals 
were ranked by index of service. This model was determined by 
the author and senior hospital administrators to be very 
useful in tentative ranking of equipment proposals. 



4 



TABLE OF CONTENTS 

I. INTRODUCTION TO THE STUDY 8 

A. BACKGROUND 8 

B. PROBLEM 10 

C. OBJECTIVE OF THE STUDY 12 

D. METHODOLOGY 12 

E. THESIS SUMMARY 13 

II. SOURCE OF FUNDS 15 

A. INTRODUCTION 15 

B. ASPECTS OF A CAPITAL EXPENDITURE SYSTEM 15 

C. FLOW OF FUNDS 16 

D. MANAGEMENT OF OPN FUNDS AT THE BUREAU OF 
MEDICINE AND SURGERY 18 

E. OPN BUDGETING AT NRMC SAN DIEGO 23 

F. SUMMARY 25 

III. INPUT ANALYSIS OF EQUIPMENT 26 

A. INTRODUCTION 26 

B. FULL-COST VERSUS INCREMENTAL COST ANALYSIS 27 

C. WEAKNESSES INHERENT IN BUREAU OF MEDICINE 
INSTRUCTION 4235. 5G 31 

D. DETERMINATION OF NET COST 34 

E. SUMMARY 45 

IV. OUTPUT ANALYSIS OF EQUIPMENT 46 

A. INTRODUCTION 46 



B. QUANTITATIVE ASPECTS OF THE MEASUREMENT OF 

OUTPUT 46 

C. QUALITATIVE ASPECTS OF THE MEASUREMENT OF OUTPUT 51 

D. COMPUTATION OF THE OUTPUT RATING FOR EQUIPMENT - 60 
V. INDEX OF SERVICE FOR RANKING EQUIPMENT PROPOSALS 66 

A. INTRODUCTION Q& 

B. DETERMINATION OF THE INDEX OF SERVICE Q6 

C. EVALUATION OF THE INDEX OF SERVICE 67 

D. SPECIAL PROBLEMS ASSOCIATED WITH THE INDEX OF 
SERVICE 70 

E. SUMMARY 71 

VI. RESULTS OF THE FIELD TEST OF THE METHOD OF ANALYSIS 72 

A. INTRODUCTION 72 

B. EQUIPMENT ITEMS SELECTED FOR EVALUATION 72 

C. RESULTS OF THE FIELD TEST 74 

D. COMMENTS RESULTING FROM THE FIELD TEST 78 

E. SUMMARY 81 

VII. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 83 

A. SUMMARY 83 

B. CONCLUSIONS AND RECOMMENDATIONS 88 

APPENDIX A: BUREAU OF MEDICINE AND SURGERY INSTRUCTION 

4235. 5G ENTITLED "PROGRAMMING OF INVESTMENT 

EQUIPMENT REQUIREMENTS" 93 

APPENDIX B: EQUIPMENT EVALUATION FORM 117 

APPENDIX C: EQUIPMENT EVALUATION SURVEY FORM 120 



6 



APPENDIX D: COST DATA RESULTING FROM THE FIELD TEST 

OF THE METHOD OF ANALYSIS 121 

APPENDIX E: FIELD TEST OF THE METHOD OF ANALYSIS 

(SUMMARY) 122 

LIST OF REFERENCES 123 

INITIAL DISTRIBUTION LIST 125 



I. INTRODUCTION TO THE STUDY 

A. BACKGROUND 

The literature indicates that the ultimate direction, 
growth, and strength of a business enterprise are determined, 
to a large extent, by the expenditures that are made for 
buildings and equipment. These expenditures are frequently 
referred to as capital expenditures. They are important 
because of the effect they have on the operating framework of 
a company, of the large amount of funds involved and their 
long term effect of these expenditures. Since capital 
expenditures are of such importance, it is only logical that 
management should judiciously use all of the techniques 
available in making decisions regarding them. 

During the past several years a great deal of attention 
has been devoted to capital expenditure analysis 
for profit-seeking enterprises. A literature search conducted 
by the author indicates that, until recently, little 
has been published directed at the analysis of capital 
expenditures of non-profit enterprises. What little has been 
published is so recent that there has been insufficient 
time for implementation and evaluation to identify an 
effective system or systems. 

Hospitals represent an important segment of the 
non-profit enterprises both in terms of the size of the 

8 



Assets 
(mil. dol.) 
30.000 



70,000. 



50,000 



50,000- 



40,000- 



30,000. 



20,000. 



10,000- 



1960 




1965 



1970 



1975 



Year 



Figure 1-1. Assets of all U.S. hospitals from 1960 through 1277 



industry and the dollars spent for capital investments 
(Fig. 1-1). Since 1967, the base year for the Consumer Price 
Index (CPI), health care costs have exceeded the CPI 
increases each year. As of December 1980 they had reached 
266% of the 1967 index and were responsible for the single 
highest percentage increase of all components of the CPI, 
which stood at 247%, at that time. In comparison, housing, 
the second largest incremental component, had increased 263% 
over the same time period [Ref. 1] . Health care costs have 
grown from Q.6% of the Gross National Product (GNP) in 1967 
to 9.1% of the GNP in 1980. This represents an increase in 
per capita expenditure increase from 260$ to 863$ or 332% 
[Ref. 2] . 

These significant increases in expenditures for health 
care have been accompanied by larger investments in hospital 
facilities. For example, the total amount of assets of all 
hospitals in the United States (U.S.) has increased from 
approximately 17.7 billion dollars in 1960 to 72.2 billion 
dollars in 1978 [Ref. 3]. These comments and observations 
illustrate the importance of the hospital industry in terms 
of its size and in terms of the rapid rate of increase in the 
investments for hospital facilities. 

B. PROBLEM 

Given the absence of proven techniques of analysis noted 
above, ranking criteria for proposed capital acquisitions 

10 



at U. S. Naval Regional Medical Center, San 
Diego, California (NRMC San Diego) have been derived by 
committee decision. Through debate and subjective input a 
committee composed of the major department heads and senior 
executive personnel integrate previously prioritized 
departmental requests for equipment purchases. The rank order 
of acquisitions is determined through the committee members' 
perceptions of future needs. Tradeoffs for favored programs 
are common among members. At no time is an explicit 
comparative analysis conducted of the benefits to be 
derived from each acquisition. Nor are the benefits of 
each acquisition ever related to the stated objectives of the 
medical center. The lack of a common set of criteria to be 
applied in ranking capital acquisitions makes this entire 
process extremely subjective. 

Upon completion of the prioritization of capital 
expenditures by the committee, the results are forwarded to 
the Commanding Officer (CO), NRMC, San Diego, California for 
approval and submission to the USN ' s Bureau of Medicine and 
Surgery (BUMED) for further consideration. Interviews 
indicate that normally any changes by the CO. are 
traditionally relatively minor in nature and inconsequential 
in the prioritization process. 



11 



C. OBJECTIVE OF THE STUDY 

The objective of this study is to develop a method of 
analysis for evaluating proposed expenditures for medical 
equipment at a NRMC , San Diego. This evaluation is in terms 
of the contribution that the equipment being considered will 
make toward the ability of the medical center to provide 
maximum service to its patients while minimizing the costs of 
increased services. All medical persons interviewed in 
connection with this study stated that the maximum service 
objective is valid. 

A significant portion of this study attempts to quantify 
the expected future service from proposed capital 
expenditures. This quantification of service is then related 
to the net cost of the item. This analysis permits the 
unification of the stated medical center objective of 
"maximum patient service" provision with the cost evaluation 
of a proposed capital expenditure. 

D . METHODOLOGY 

In developing a model for capital expenditure decisions 
at a NRMC the author utilized three different research 
techniques: 

1. A literature search covering methods of capital 
expenditure analysis for non-profit organizations; 



12 



2. Correspondence and interviews with professional and 
administrative organizations within the USN ' s health care 
community; and 

3. A survey of health care personnel to determine 
weighting factors for the measurement of output. By 
determining a measure of benefit to be derived from each 
acquisition and associating with it a net cost, an index 
of service can be derived which will enable the 
decision-maker to rank objectively all alternatives as an aid 
in the decision process. 

E. THESIS SUMMARY 

In this chapter we have provided a brief summary of the 
methods currently used in determining capital acquisitions at 
a NRMC. The importance of rationally analyzing the 
decisions through the ranking of alternatives, is then 
discussed. 

Chapter II contains an explanation of the capital 
expenditure philosophy used throughout this study and a 
background of the capital expenditure analysis currently used 
at NRMC San Diego. 

A development of the cost model to be associated 
with the input analysis of equipment considered for 
acquisition is the subject of Chapter III. 



13 



Chapter IV involves the determination of an output rating 
for equipment and includes both qualitative and quantitative 
aspects . 

Once input and output measures have been determined these 
results are combined in Chapter V to compute an index of 
service for use in ranking equipment purchase proposals. 

In Chapter VI a field survey is conducted at NRMC San 
Diego applying the model to rank the top five proposals 
submitted for fiscal year 1982. 

Finally, in Chapter VII the author summarizes the thesis 
and, based on the research findings, makes some 
recommendations for future condideration . 



14 



II. SOURCE OF FUNDS 

A. INTRODUCTION 

In this chapter the elements of a capital expenditure 
system are discussed and those elements relevant to this 
study are identified. Next, the flow of funds from 
Congressional passage of the Appropriations Bill to NRMC 
notification of funding authority is briefly detailed. A 
summary of restrictions imposed by BUMED and their guidance 
in investment equipment purchases for field activities under 
their command precedes a short narrative describing the 
budgeting policy currently in use at NRMC, San Diego. 

B. ASPECTS OF A CAPITAL EXPENDITURE SYSTEM 

From the financial management literature we find that the 
components of a capital expenditure system may be 
categorized as follows: a preliminary consideration and 
appraisal of projects; the formal request for appropriation 
of funds; measurement of expenditures against 
appropriations; and the post-completion audit of results. The 
preliminary consideration and appraisal of projects should 
include an analysis of a proposed expenditure to determine 
the expected contribution of that expenditure toward the 
objectives of the entity. The formal request for 
appropriation of funds defines the goals of the command and 

15 



capital budgeting philosophy. Capital budgeting is 
one aspect of a comprehensive budgeting system. The 
measurement of expenditures against appropriations refers to 
the process of comparing actual expenditures to budgeted 
expenditures for a project. This function would be performed 
as the project expenditures are being made. 

The post-completion audit of results includes follow-up 
techniques to compare the actual benefits from an 
expenditure with the benefits anticipated in the 
preliminary consideration and appraisal of projects phase. 
The post-completion phase of a capital expenditure system 
would enable a manager to evaluate the ability of various 
individuals in an organization to project benefits from a 
capital expenditure and to determine the effectiveness and 
reliability of the preliminary appraisal of projects phase of 
a capital expenditure system [Ref. 4]. 

The purpose of this study is to develop a method of 
analyzing proposed NRMC expenditures for medical equipment 
to increase the level of patient care. For this 
reason, the preliminary consideration and the appraisal of 
the projects phase of a capital expenditure system will be 
emphasized. 

C. FLOW OF FUNDS 

Funding for the purchase of investment items (capital 
expenditures ) originates with the signing by the President 

16 



of the appropriation act enacted by Congress. Included in 
this act is a multiple year appropriation for the part of the 
United States Navy's (USN) investment program known as Other 
Procurement Navy (OPN). OPN funds, as defined by the 
Comptroller of the Navy (NAVCOMPT) and pertaining to a NRMC , 
are basically any item of equipment costing over $3000 with 
the exception of vehicles [Ref. 5]. 

Once this program has been appropriated, an apportionment 
is determined by the Office of Management and Budget (0MB). 
The primary purpose of an apportionment is to control the 
rate at which funds are used. The apportionment by 0MB may 
limit all obligations to be incurred during the period 
specified or it may limit obligations to be incurred for a 
specific activity, function, project, object, or a 
combination thereof. [Ref. 6] 

Next OPN funds flow through the Secretary of Defence and 
Secretary of the Navy. At this level NAVCOMPT allocates 
these funds to the appropriate operating agencies for the 
purpose of making allotments. The primary purpose of an 
allocation is to ensure that the congressional intent is 
followed for budget activities/programs below the 
appropriation level. 

All OPN funds are allocated to the Office of the 
Chief of Naval Operations (CNO), which acts as the 
Responsible Office for these appropriations. The CNO * s 
Comptroller (0P-92) administers the funds and reallocates OPN 

17 



funds to the major claimants. The Bureau of Medicine and 
Surgery (BUMED) is one of the major claimants receiving 
allocations of OPN funds. 

D. MANAGEMENT OF OPN FUNDS AT THE BUREAU OF MEDICINE AND 
SURGERY 

The management of OPN funds at The Bureau of Medicine 
and Surgery (BUMED) is governed by BUMEDINST 4235. 5G of 13 
March 1979 (App. A) entitled "PROGRAMMING OF INVESTMENT 
EQUIPMENT REQUIREMENTS". The intent of this detailed 
instruction is to establish procedures for programming 
investment equipment requirements at all BUMED commands, to 
increase emphasis on the investment equipment program within 
the Navy Medical Department, and to allow BUMED to perform 
detailed analysis on the investment equipment in justifying 
various budget requests and generating short-fused, one time 
reports in a variety of formats. The Navy Medical Department 
is defined as BUMED and all its field activities. 

BUMEDINST 4235. 5G was instrumental in establishing the 
capital expenditure program currently in use in BUMED. Some 
of the principal innovations and points are summarized below. 

1. Established an equipment replacement program. This 
program mandated the institution of equipment review 
committees which develop the command's investment equipment 
budget or additional (emergency) requirements after the 
budget submission. The minimum composition of this committee 

18 



at a Naval Regional Medical Center (NRMC) shall be: 
commanding officer, chiefs of services, a representative from 
each branch clinic, one staff Civil Engineer (CEC) or 
activity CEC officer, and one biomedical equipment 
technician. This committee is additionally tasked with 
conducting a continuing review of each item of investment 
equipment. This review provides documented evidence of the 
age and physical condition of all investment equipment. 
Through this review and Enclosure (1) to the basic 
instruction, a guide in determining the normal life 
expectancy of many items of equipment, the committee develops 
a plan of replacement for capital items for the budget year, 
the budget year plus one, and the budget year plus two. 

2. Emphasis of the review procedures for high cost 
medical equipment. All requests for medical equipment with a 
unit or system cost of greater than $200,000 must be 
accompanied by endorsements from the local Health Systems 
Agency (HSA) and regional Tri-Service Medical Investment 
Review Committee. 

3. Established costing procedures to be used in 
justifying -acquisition. Enclosure (3) to the basic 
instruction involves an analysis of life cycle costs to 
be computed for all investment equipment requested by a 
command under BUMED. This worksheet is not submitted with the 
request to BUMED but is retained at the command. In cases 
where acquisition costs exceed $15,000 (to be raised to 

19 



$50,000 by Ref . 7). Enclosure (4), a summary of the 
costs determined by Enclosure (3), is to be submitted with 
the request. 

4. Established request procedures for certain equipment 
outside BUMED's pervue. Due to their inherent nature and/or 
direction from higher authority, certain investment items 
require approval form other Navy Departments or Agencies 
although utilized by BUMED activities. BUMEDINST 4235. 5G 
dictates procedures to be followed in requesting investment 
equipment of this nature. Equipment included in this category 
are also listed and include; 

a. Hospital communications systems and individual 
equipment items, including radio paging, two way radio, 
telemetry, nurse call, audiovisual paging, intercom, etc. 

b. Microfilm equipment 

c. Reprographic (quick copying and duplicating) 
equipment . 

d. Word processing (dictating and automated typing) 
systems. 

e. Filing equipment 

f. Automatic data processing equipment including data 
communications equipment. 

g. Diagnostic X-ray systems (less dental). 

h. Lease or rental of any equipment, material, or 
service . 



20 



Submission of an annual investment equipment requirement 
is required by BUMED of all its activities. This letter, 
which is a priority sequence of investment equipments with 
appropriate justification requested for the budget year, must 
be received no later than 15 June of each year. The budget 
year is defined as the fiscal year following the current 
year. BUMED also requires submission of an investment 
equipment budget for the budget year plus one and the budget 
year plus two. These letters must be received by 15 March of 
the current fiscal year. When submitting these budgets BUMED 
activities are reminded that all unfunded budget items for 
the current fiscal year should be considered cancelled at the 
time of preparing the budget year submission. This 
requirement allows proper prioritization of total command 
requirements. This is not to say that items unfunded at the 
time of budget submission will not be funded at a later time 
from the current fiscal year appropriations. It must be 
remembered that OPN is a multi-year appropriation. BUMED as 
a major claimant has three years beginning with the budget 
year in which the appropriation has been granted to obligate 
these funds. 

In fact supplemental augmentations are common in 
BUMED ' s funding of investment equipment. For example in FY81 
which has two years remaining for the obligating of funds, 
supplemental grants have accounted for 48.8 percent or 
$996,000 of the total grant awarded NRMC San Diego as of 30 

21 



September 1981 [Ref. 8]. Additionally, after the three year 
obligation period for OPN funding has expired, activities 
have two years in which to close their accounts. 

Upon receipt of budget year requests from all activities 
and authorization to obligate funds from CNO (OP-92), BUMED 
apportions funds using a predetermined formula. In FY81 the 
method used to determine resource allocations was based on 
the total inventory dollar value of the Navy Medical 
Department and the inventory dollar value reported by each 
field activity; i.e. the ratio of the field activities 
inventory dollar value to the total medical department 
inventory dollar value, multiplied by the total resources 
initially made available yielded each activities initial 
funding level [Ref. 9]. It must be remembered that because 
of the apportionment process at OMB the initial outlay of OPN 
funds is only a fraction of the total congressionally 
approved apportionment. 

Inventory values are determined by the different 
activities investment equipment inventory reports, a required 
quarterly submission from each activities equipment review 
committee. For example, the OPN initial budget for NRMC San 
Diego for the past three fiscal years has ranged from 12-14 
per cent of the total BUMED apportionment [Ref. 10]. 



22 



E. OPN BUDGETING AT NRMC SAN DIEGO 

As previously mentioned the determination of investment 

equipment items and their prioritized ranking is done in a 

meeting of the NRMC Investment Equipment Review Committee. 

Although this committee or its members are not designated in 

writing, the author found that, because of its important 

purpose of allocating scarce resources, its existence was 

widely known and membership considered exalted positions. 

The following officers are current members of the Committee: 

Commanding Officer, NRMC San Diego (Chairman) 
Commanding Officer, Naval Regional Health Care Center 
Director of Clinical Services, NRMC San Diego 
Director of Administrative Services, NRMC San Diego 
Heads of all Medical Services Department, NRMC San 

Diego (26) 
Public Works Officer, NRMC San Diego 
Comptroller, NRMC San Diego 

Officer in Charge Branch Clinic NAS North Island 
Officer in Charge Branch Clinic NAS Miramar 
Officer in Charge Branch Clinic NAVPHIBASE Coronado 
Officer in Charge Branch Clinic NAVSTA San Diego 
Officer in Charge Branch Clinic NOSC San Diego 
Officer in Charge Branch Clinic NSC San Diego 
Officer in Charge Annex NTC San Diego 
Officer in Charge Branch Clinic FLTASWSCOL San Diego 
Officer in Charge Branch Clinic NAVCOMMSTA San Diego 
Officer in Charge Branch Clinic MCRD San Diego 
Officer in Charge Branch Clinic NAF El Centro 

The total number of members of this board has varied between 

31 and 35. The fluctuation is caused by individuals 

holding two or more of the above positions [Ref. 11]. A 

biomedical equipment technician also sits on the committee as 

a consultant on equipment maintenance costs, reliability, 

repair parts availability, etc. 



23 



In approximately mid January of each year the Committee 
is advised of a meeting to be held in March and agenda items 
for that meeting. Attendance is required for all those 
members who have submitted investment equipment items for 
inclusion in the budget year transmittal letter. This 
meeting is convened over several days and does not dismiss 
until all items have been put in rank order. All items 
requested in previous years must be included in this ranking 
if they have not yet been funded. To remove an item once it 
has been submitted requires separate correspondence and BUMED 
approval. Requested items are classified into two categories: 
those deemed essential and requiring only relative ranking by 
the Committee and those items not essential at the 
moment. Prior determination by the Commanding Officer, NRMC 
San Diego is the criteria used in classifying equipment into 
each of these categories. In ranking investment equipment 
items the OPN Equipment Budget Item Justification Worksheet 
(Encl (3) to App . A) is the basic document used in 
determining cost. Need and the sponsor's ability to transmit 
that need to the committee and the chairman are the most 
important factors in ranking. Cost is considered to a lesser 
degree. Interviews indicate that those items whose life cycle 
costs are lower within each category generally receive more 
favorable consideration. 

Thus, the whole ranking procedure is very 
subjective. Costs are determined precisely but, as will be 

24 



shown later, the basis for these costs is somewhat less than 
precise. No attempt to quantify the benefits to be derived is 
ever attempted. Only in the remarks section of the OPN 
Equipment Budget Item Justification Worksheet is there a 
reference made to benefits to be derived from a particular 
equipment purchase. 

F. SUMMARY 

This chapter was intended to impart to the reader a basic 
knowledge of the components of a capital expenditure system 
as applicable to this study. Once the objectives have been 
defined the actual processes involved in authorizing funds 
for expenditure on capital investments at the NRMC level was 
examined. These processes included both the actual flow of 
funds down to the NRMC level and the decision process 
conducted at that level in determining priorities for capital 
investment spending. 



25 



III. INPUT ANALYSIS OF EQUIPMENT 

A. INTRODUCTION 

The purpose of the input analysis is to determine the net 
investment or outlay which would be required if an equipment 
request were to be approved. A technical approach to this 
analysis, and the method to be used by the author is this 
study is called benefit/cost analysis. The underlying concept 
is that an investment should only be undertaken if its 
benefits exceed its costs and the approach therefore involves 
an attempt to measure both benefits and costs. 

The idea of comparing the benefits of a proposed course 
of action with its cost is not new. Techniques for analyzing 
the profitability of proposed business investments have been 
in vogue in private industry for many years. Certain 
government agencies, such as the Bureau of Reclamation, have 
made such analysis for decades. With the advent of the 
Planning Programming Budgeting System (PPBS) in the 
Department of Defense (DOD) in the 1950 's it became 
fashionable to apply benefit/cost analysis to all sorts of 
proposed programs in public sector nonprofit organizations. 
However the results of these efforts have been mixed, and 
there is now considerable controversy about the merits of the 
whole approach. Nevertheless, benefit /cost analysis has 



26 



undoubtedly produced results. There are two essential points 
to be made: 

1. Benefit/cost analysis focuses on those consequences 
of a proposal which can be estimated in quantitative 
terms. Since there are few important problem in which 
all the relevant factors can be reduced to numbers, 
benefit /cost analysis generally will not provide the 
complete answer to any important problems. 

2. However, if some of the important factors can be 
reduced to quantitative terms, it is often better to 
do so than not. The resulting analysis narrows the 
area within which management judgement is required, 
even though it does not eliminate the need for 
subjective value judgement. [Ref. 12]. 

From the above it can be easily seen that the analysis of 

costs is an essential element of any benefit/cost analysis. 

The purpose of this chapter is to determine the net 

investment which would be required if a proposed equipment 

investment was undertaken. 



B. FULL-COST VERSUS INCREMENTAL COST ANALYSIS 

An input analysis can be developed by using a full-cost 
or an incremental cost approach. The approach selected should 
provide the decision-maker with relevant information, and the 
analysis should provide a consistent ranking of the 
alternatives. 

Full-costing or absorption costing analysis would include 
all costs of a project. Those costs could be subdivided into 
direct and indirect. Direct costs would include those 
expenses that can be directly associated with a project. 
Indirect costs are those incurred for the benefit of more 



27 



than one project or activity an they must be appropriately 
allocated to those projects. Expenses of this type include 
such items as supervisory salaries, utilities, insurance and 
taxes. Since these expenses connot be assigned directly to a 
project, they are allocated to all the projects benefiting 
from the expense incurred, in a full-cost analysis. [Ref. 
13] . 

Incremental or differential costs analysis would include 
all future costs that would be different because of the 
decision to purchase new equipment. For example, if new 
equipment was being considered for the surgery department the 
appropriate types of operating costs would be the same as 
mentioned above in the full-cost analysis discussion. 
However, these costs would be included in the analysis only 
if they will change as a result of a decision to purchase the 
equipment. As an example, salary costs would be included in 
an incremental analysis only if additional costs were 
incurred because of the equipment purchase. [Ref. 14]. 

A simple example of the use of full-cost or incremental 
cost analysis for operating costs is contained in Figure 
III-l. 

Full-Cost Incremental-cost 
Analysis Analysis 
Operating expenses: 

Salaries $1950 

Fringe benefits 269 

28 



300 


$300 


225 


225 


180 


180 


30 





120 





360 






Maintenance costs 

Supplies 

Power 

Other Utilities 

Floor space 

Other costs 



$3435 $705 

Figure III-l Full-cost versus incremental operating costs 

The example above refers to annual operating costs for a 
hypothetical proposed item of equipment. The estimates are 
$3,435 for the full-cost analysis and $705 for the 
incremental-cost analysis. The difference in the two 
approaches is in the treatment of the salaries and fringe 
benefits which are direct costs, and the other utilities, 
floor space, and other costs which are indirect costs. 

The assumption regarding the salary and fringe benefit 
costs is that an existing employee or user presently has idle 
time which can be utilized if the equipment is purchased. The 
salary charge, in the full-cost analysis, represents an 
allocation of the operator's salary for the estimated time 
required to operate the equipment. The fringe benfit item is 
an allocation of the employer's share of social security 



29 



taxes, state and federal unemployment taxes, pension payments 
and other insurance benfits. 

Because of the assumption that the employee has idle 
time, there is no charge in the incremental cost analysis for 
salaries or fringe beneifits. The justification is that 
these costs will not change in the future if the proposed 
equipment is purchased and therefore should not be included 
in an incremental analysis. 

The utilities, floor, space and other cost items are 
considered to be indirect. That is, these costs are incurred 
for the benefit of more than one project. Therefore, the 
full-cost analysis includes an allocation of these costs to 
all projects that will benefit from their incurrence. These 
indirect costs are not included in the incremental analysis 
because they are not expected to change in the future if a 
decision is made to purchase the equipment. The estimated 
costs of $705 in the incremental analysis, therefore, 
represent the only additional future operating costs that 
would be generated by the purchase of the new equipment. 

The next consideration then, would be, should analysis 
procedures for medical center equipment involve the use of 
full-cost or incremental cost analysis? The cost items 
included in this analysis are estimates of what will occur in 
the future. These estimates of the future should include 
only relevant cost data. In deciding among alternatives, 
many leading authorities state that relevant costs are those 

30 



that will be different under one alternative from what they 
will be under the others. [Ref. 15]. Therefore, incremental 
cost analysis (differential costs) will be used in the 
remainder of this study. 

Two factors are important, therefore, in the 
determination of relevant cost data. The first factor is that 
all cost data should pertain to future costs. The second 
factor is that only those cost items that will be changed 
because of the alternative being considered should be 
included in the analysis. 

C. WEAKNESSES INHERENT IN BUREAU OF MEDICINE INSTRUCTION 
4235. 5G 

Before going any further it is necessary to point out 
other noted deficiencies in the current BUMED guidance for 
cost determination in proposed investment equipment 
acquisitions. These deficiencies were identified by the 
author in researching the costs used in completing the BUMED 
Other Procurement Navy (OPN) Equipment Budget Item 
Justification Worksheet and in interviews with hospital 
administrators . 

An often voiced complaint was the lack of clarity and the 
seemingly irrelevance of many items on the Worksheet. It 
must be remembered that this is a BUMED directive and it is 
prepared for their own purposes. To incorporate this 
Worksheet in its entirety as a Naval Regional Medical Center 

31 



(NRMC) directive to be used in determining local priorities 
for investment equipment is asking the chiefs of service to 
do more than what is necessary. This Worksheet is intended 
for BUMED use in justifying purchases to DOD and Congress. 
The detailed information requested for that purpose is not 
necessary at the NRMC decision-making level. Additionally, 
chiefs of service stated they are not trained, nor do they 
have the time or manpower, to complete the cost analysis of 
the Worksheet [Ref. 16]. In reality interviews indicated 
that most of these figures are obtained from the product 
salesman, a violation of the basic instruction requiring 
in-house or Navy staff studies and surveys in support of 
systems and equipment requests. 

In detailing costs the time value of money is ignored by 
the BUMED directive. This directive states in enclosure (4) 
that the concept of the present dollar value of future 
outflows is not taken into account since it assists neither 
BUMED nor the command in its analysis of life cycle costs. 
This assumption is fallacious in that the supplies and annual 
maintenance costs often exceed the acquisition cost of 
medical equipment. To award these future outflows full value 
in the present time analysis distorts the life cycle costs 
and heavily biases the analysis against the equipment 
purchases. The same point can be made for the inclusion of 
the one time disposal cost or salvage value of the equipment. 
This is a return of funds several years in the future for the 

32 



sale of the equipment at the end of its service life. To 
include those funds in the present analysis at their future 
value misrepresents the salvage value and lowers the life 
cycle costs biasing the analysis in favor of the equipment 
purchase. 

The Worksheet was not intended purely as a cost-analysis 
determination. It is a justification worksheet. The 
inclusion of subjective questions with "yes" and "no" answers 
without assigning costs was argued by the chiefs of service 
as unfair. For example, questions regarding the population 
base served and the effect on anticipated workload, although 
not assigned a value, imply imputed costs. Imputed costs are 
hypothetical costs representing the cost or value of a 
resource measured by its use value. Imputed costs do not 
involve actual cash outlays and are not considered in 
accounting cost calculations [Ref. 17]. To assign a 
decreasing workload to a proposed equipment purchase attaches 
to it a stigma at budgeting time because it is viewed as 
decreasingly important by other chiefs of service. In 
actuality it might be considerably more efficient than 
present techniques thereby freeing resouces for other uses. 

In summary, the disadvantages then are the length and 
irrelevant detail of the Justification Worksheet of BUMEDINST 
4235. 5G. Although this information is required by BUMED it 
is not necessary at the NRMC level for decision-making in 
ranking priorities. The Life Cycle Cost Analysis Worksheet 

33 



is viewed by NRMC administrators as too simplistic in its 
assumptions. To ignore the time value of money is not 
realistic in this age particularly when one observes the 
workings of budgetary regulatory agencies. Therefore, all 
estimates of cash outflow should be time-adjusted to a common 
point of time before they are added together. For purposes 
of this study, all cash outflows will be time-adjusted to the 
point of the initial outlay for the investment. Current 
outlays will then be stated at 100 per cent, and all 
estimates of future outflows will be time-adjusted to the 
point of the current outlay. For the remainder of this 
study, future outlays will be discounted at ten per cent per 
annum as per the DOD Cost Comparison Handbook [Ref. 18]. 

D. DETERMINATION OF NET COST 

There are three computations involved in the input 
analysis for new equipment. These computations are 
incremental acquisition cost, incremental operating cost, and 
net outlay cost. The remainder of this chapter will discuss 
the way in which these costs are determined. 

1 . Incremental Acquisition Cost 

The first part of the input analysis involves the 
determination of the incremental acquisition cost. It 
follows from the discussion of relevant cost date above that 
only future costs which will be different should be included 
in the computation of incremental acquisition cost. When 

34 



discussing the following sections, reference should be made 
to Appendix B of this thesis in order to identify each item 
of the input analysis. 

The original invoice cost is easily determined from 
the vendor's invoice. In most cases this includes the 
equipment transportation cost. Should that not be the case 
and the purchaser is required to pay the transportation cost 
as a separate item, it should be included under this cost 
category. Therefore, transportation cost may either appear 
as a portion of the original invoice cost or as a separate 
charge. 

Installation costs would include expenditures for 
utility connections, rearrangement of the room dividers and 
the reinforcement of the building structure. These costs as 
defined by BUMEDINST 4235. 5G are to be borne by Operations 
and Maintenance, Navy (0 & M N) funds. Again, in many cases 
some of these costs are included in the acquisition cost and 
are paid by the vendor. 

An item easily overlooked in analysis of this type is 
additional working capital requirements. Typically this item 
would include additional investments in accounts receivables, 
inventories, and prepaid expenses. If additional 
liabilities, such as accounts payable, will be incurred 
because of the added investment in assets, these liabilities 
should be deducted from the assets. Therefore, the 
additional investment in working capital which will be 

35 



required for the operation of the new equipment should be 
included in the analysis. Training costs if they are to be a 
one-time initial expense should also be included in 
acquisition costs. 

The items discussed above, original invoice cost, 
transportation cost, installation cost, additional working 
capital, and training costs, should be added together to 
determine the total of the original outlay cost. 

All proceeds from the retirement of assets which will 
be made possible because of the new equipment purchase should 
be deducted from the toal outlay cost. Examples of possible 
asset retirements would include the sale of existing 
equipment which would no longer be needed if the new 
equipment is purchased, and a reduced investment in supplies 
inventory made possible by the utilization of new equipment. 
The total proceeds from assets released because of the 
proposed equipment should then be deducted from the total 
outlay cost to arrive at the new incremental acquisition 
cost . 

The amount of funds that will be released at the end 
of the proposed equipment's life should be estimated. This 
would include the salvage value of equipment and working 
capital released by the sale of the equipment. This estimate 
of funds released should be time-adjusted as illustrated 
below reflect the present value of these estimated future 
dollars . 

36 



1. Estimated salvage value of the 

proposed equipment (in five years) $200,000 

2. Estimated working capital 
released when the proposed 

equipment is retired 26,000 

3. Total funds released at the 
end of the economic life of 

the proposed equipment 226,000 

4. Time adjustment factor of 

10% in five years .621 

5. Present value of investment 

released in five years 140,346 

Reference was made in the time-adjustment of cash 
outlays that the economic life of equipment should be 
estimated. The determination of this estimate involves a 
consideration of obsolescence, physical life, and maintenance 
policy for the equipment. Enclosure (1) of Appendix A to this 
thesis should be used as a guide in determining economic life 
of equipment but should not be the sole criteria. In the 
medical field equipment obsolescence is the primary 
consideration and expected future developments should be 
determined. An estimate of the economic life of the 
equipment is also necessary in order to project life cycle 
operating expenses associated with the equipment. 



37 



2 . Incremental Operating Cost 

The second part of the input analysis involves a 
computation of the incremental operating cost. Operating 
costs are included in the analysis because of their 
importance to an equipment decision. For example, in many 
cases operating costs exceed the original outlay cost for 
equipment. [Ref. 19]. Many of those interviewed by the 
author indicated that the significant expenses in medical 
services, particularly in the x-ray field requiring the use 
of specialized equipment are the costs of personnel and 
supplies for operation. In many hospitals the idle time of 
equipment is insignificant in comparison with the idle time 
of highly paid professional personnel. [Ref. 20]. These 
comments serve to illustrate the importance of including 
operating costs in the analysis for proposed equipment. 

The incremental operating cost should be determined 
on a per annum basis for the economic life of the equipment. 
The annual incremental operating costs should then be 
time-adjusted in the same manner and for the same reasons as 
were given in the earlier discussion. Training of medical 
personnel to operate new equipment may be included either as 
a one time acquisition cost or as an annual operating cost. 
In some cases this expense is included in the purchase price 
of the equipment. If training costs are annual expenses, 
they must be recorded in this portion of the analysis. 



38 



Additional salary costs incurred because of the 
decision to purchase equipment should be determined. Fringe 
benefits associated with the additional salary costs can be 
computed from the Cost Comparison Handbook. [Ref. 21]. The 
current directive calls for a figure of 20.4 per cent to be 
used in calculating retirement benefits of federal employees. 
Other figures mandated for determining fringe benefits are 
3.7 per cent for federal employee insurance (life and health) 
benefits and 1.9 per cent for employee workmen's 
compensation, bonuses and awards, and unemployment programs. 
In the author's analysis an average cost derived from the 
ratio of fringe benefit costs to total salary costs will be 
used. 

Maintenance costs are determined from equipment 
maintenance records of similar equipment and manufacturer's 
estimates. Consumable supplies cost is based on projected 
usage rate. This figure is obtained from the Justification 
Worksheet. Power and utilities figures cannot be determined 
for individual pieces of equipment. Here, the analysis relies 
on the manufacturer's estimates. Floor space costs should be 
included in the analysis if the new equipment will affect the 
total outlay made for space costs, or if there is another 
valuable use for the space required by the new equipment. In 
most cases equipment proposals are for replacement equipment 
and this figure is irrelevant and can be disregarded. The 



39 



form for the computation of incremental operating cost per 
annum is presented in Appendix B to this study. 
3 . Computation of Net Outlay Cost 

The purpose of this section of the analysis is to 
bring together the various factors discussed previously; net 
incremental acquisition cost and incremental operating cost 
of equipment. The net incremental acquisition cost which was 
discussed in the first part of the input analysis should be 
included in the computation. Next, the incremental operating 
cost per annum, the second item discussed in the input 
analysis, should be included in the computations of the net 
outlay cost. These incremental operating costs should then 
be time-adjusted. The time-adjustment technique previously 
illustrated in connection with the salvage value of the 
proposed equipment. It is assumed for the purposes of 
time-adjustment that the cash flow occurs at the same time 
that the costs are recognized. 

If these estimated costs are uniform throughout the 
life of the equipment, they can be time-adjusted by applying 
one present value factor. If the estimated costs vary each 
year, then each year they will have to be time-adjusted 
individually. 

a. Estimated annual incremental operating costs are 
uniform (3 years): 

Estimated costs per annum $26,000 
Time-adjusted factor 2.487 

40 



Time-adjusted incremental 

operating costs over the 

lifetime of the equipment $64,662 

b. Estimated annual incremental operating costs are 

not uniform (3 years): 

1st yr. 2nd yr. 3rd yr. 
Estimated costs per annum $26,000 $28,600 $31,460 

Time adjustment factor 0.909 0.827 0.751 

Time-adjusted incremental 

operating costs over the 

lifetime of the equipment $23,634 $23,652 $23,626 

Total time-adjusted incre- 
mental operating costs 
over the lifetime of the 
equipment. $70,912 

Figure III-2 Illustration of two methods of time-adjusting 

incremental operating costs. 

The time-adjustment factors used in Figure III-2 
assume a discount rate of ten per cent compounded annually. 
In part one the operating cost is assumed to be constant for 
a hypothetical piece of equipment over the estimated three 
year lifetime of that equipment. In part two the operating 
costs are assumed to increase annually at a rate of ten per 
cent over the three year lifetime of that equipment. The 
time-adjusted technique used in part one of Figure III-2 for 
uniform costs is an annuity method. An annuity may be 
defined as equal installments over equal periods of time. 
[Ref. 22]. 

The individual time-adjustment factors, used in part 
two of Figure III-2 where annual costs are not uniform, are 



41 



related to the time-adjustment factor that was used for 

uniform costs. The total of the three time-adjustment 

factors used where annual costs are not uniform (0.909 + 

0.827 + 0.751 = 2.487) is equal to the time-adjustment factor 

used for uniform annual costs (2.487). 

For the remainder of this study the particular method 

that is applicable to the individual piece of equipment being 

analyzed will be applied. Figure III-3 below is an example 

of the computation of net outlay cost. The figures used are 

those determined for the purchase of a computed tomographic 

scanner, the top priority item requested by NRMC San Diego in 

their FY 82 investment equipment budget request . These 

figures can also be found in Appendix D. 

a. Incremental Acquisition Cost 

Original invoice cost $1,395,000 

Transportation cost (included 

above) 

Installation cost 83,000 

Training cost 80,000 

Additional working capital 25,000 

Total initial outlay $1,583,000 

Less salvage value of assets 

released because of the equipment 

Less the present value of 

salvage value and net working 

capital released at the end of 

equipment's economic life 340,342 

Incremental acquisition cost $1,242,658 



42 



b. Incremental Operating Cost Per Annum 
Training requirements 

Salaries 24,500 

Fringe benefits 6,370 

iMaintenance 80,000 

Supplies 26,000 

Power 4,000 

Other utilities 

Floor space 

Insurance 

Other specify 

Total operating cost per annum $140,870 

c. Computation of Net Outlay Cost 

Net incremental acquisition cost $1,242,658 

Total operating cost per annum 140,870 

Time adjustment factor 3,791 

Time adjusted incremental 

operating cost for the estimated 

equipment life 534,038 

Total outlay cost $1,776,696 

Figure III-3. A computation of net outlay cost 

The individual costs used in Figure III-3 were 

determined from the manufacturer's estimate, equipment repair 

records and departmental personnel requirement estimates. In 

determining salvage value the straight-line method of 

depreciation was used. This is the method currently in use 

at NRMC San Diego. Enclosure (1) to Appendix A estimates 



43 



eight years as the economic life of a tomographic scanner. 
Projected advances in medical technology suggest this 
equipment will be obsolete in five years. Five years was 
used as the estimated life while the equipment was 
depreciated over eight years to determine salvage value. 
Again, ten percent was used as the discount rate in 
projecting present value of the salvage value of equipment 
and working capital released. All methods used were those 
currently in use or coming into use at NRMC San Diego. They 
will remain consistent throughout the remainder of the study. 
In benefit /cost analysis in all profit and in many 
non-profit enterprises there is one more point to be 
considered when computing net outlay cost. That is, the 
anticipated annual revenue received from the use of the 
proposed equipment. Normally this revenue would be 
time-adjusted over the lifetime of the equipment and deducted 
from the net outlay cost to determine the actual cost. In 
this case revenue is not a consideration. For these patients 
whom the NRMC serves there is no revenue associated with the 
use of the equipment. In some instances outside agencies, 
such as local community hospitals and other NRMC ' s will use 
NRMC San Diego's equipment or facilities. However, these 
dealings result in reciprocity of services in almost every 
instance and there is no exchange of funds. Since no 
monetary value can be easily attached to these mutual 



44 



services, there is no revenue received. The net outlay cost, 
then, is the cost of the equipment. 

E . SUMMARY 

The input analysis developed in this chapter is a 
determination of all relevant costs which would be incurred 
if a proposed piece of equipment were to be purchased. All 
these costs are incremental in that they would accrue only 
if the equipment was actually bought, installed and 
operated. Although most of these costs are considered and 
included in the OPN Equipment Budget Item Justification 
Worksheet of BUMEDINST 4235. 5G this cost analysis was 
considered necessary for several reasons. The complexity and 
intermingling of subjective with actual costs in the BUMED 
directive have lessened its value to those decision-makers at 
the NRMC level. The same argument can be applied to the 
applicability of many of the required calculations. The 
disregard of the time value of money when considering future 
operating costs and salvage value was determined to be an 
erroneous and fallacious assumption. And finally, the 
expenditure of resources required in many instances to obtain 
the depth and accuracy of requested information resulted in 
incomplete and less than accurate figures. 



45 



IV. OUTPUT ANALYSIS OF EQUIPMENT 

A. INTRODUCTION 

There are two aspects of the author's analysis: quantity 
of output and quality of output. The first item pertains to 
the volume of service rendered and the second item pertains 
to the nature and importance of the service rendered. In 
this chapter these two factors will be discussed and criteria 
for their measurement determined and weighted accordingly. 

B. QUANTITATIVE ASPECTS OF THE MEASUREMENT OF OUTPUT 

One of the assumptions of this study is that the 
objective of a hospital is to provide service to its 
patients. Although objectives were not documented by 
Naval Regional Medical Center (NRMC) San Diego directive, all 
medical center personnel interviewed agreed "that the 
objective of a NRMC is to provide maximum service to its 
patients with a limited amount of funds in the long run." 
Therefore, in order to determine how well the proposed 
equipment will contribute to this hospital objective, it is 
necessary to measure (estimate) the amount of service that 
the equipment will provide. The purpose of this "output 
analysis" section of this thesis is to develop a method of 
measuring the estimated service that will be provided by 
equipment . 

46 



Another assumption of this study is that dollars taken in 
as revenue are generally used as a measure of service for 
profit-seeking enterprises. For this reason, traditional 
rate-of-return analysis generally uses dollars of revenue as 
a measure of output in new equipment analysis. Revenue 
cannot be used as an output measure for a NRMC because, as 
previously discussed, it is insignificant and incident to 
it's principal role. 

The author, through a literature search, found three 
units that were commonly used to measure the quantity of 
output for hospital and medical centers in capital budgeting 
patient days, hours of use, and patients served (occasions of 
service). The patient days and hours of use measurement 
units are time related in that time is the unit of measure. 
The patients served indicator would record the frequency and 
number of services provided by the equipment. 

The requirements of a measurement unit of service are 
that the unit of measurement should be a valid indicator of 
the service provided, and that the unit of measurement can be 
used as a common denominator for the inter-ranking of 
requests from the various special professional service 
departments [Ref. 23]. It would seem logical to the author 
that either hours of use or patients served could be used as 
a reasonable indicator of the service provided. Patient days 
would require apportionment of that unit of measure over 



47 



various services and equipments, a computation for which data 
is not available. 

Patients served (occasions of service) could be used as 
an indicator of service provided within a department; 
however, it has limitations as a common denominator for the 
inter-ranking of requests among the various departments. 
For example, within the surgery department there is major and 
minor surgery. There is some disagreement among medical 
personnel about what constitutes major surgery and what 
constitutes minor surgery. It has been suggested that three 
minor surgeries are comparable to one major surgery [Ref. 
24]. However, there is no general agreement on the 
relationship. Therefore, the use of patients serviced as an 
indicator of output has limitations within a department 
because of the lack of comparability between variation in 
components of occasions of service. This limitation of the 
patients served criterion also applies to the various 
laboratory departments and the delivery department. 

Another problem associated with the use of the patients 
served criterion as a measure of output is the inter-ranking 
of requests from various departments. The purpose of this 
analysis is to compute an index of service for each equipment 
request from all professional service departments by 
dividing the estimated output by the estimated input 
(benefit /cost ) . The result will represent the estimated 
output rating per dollar of net cost. The requests from all 

48 



departments will then be ranked from highest service per 
dollar of net cost to the lowest service per dollar of net 
cost. The inputs, discussed in the preceding chapter, are all 
stated in dollars which represent a comparable unit of 
measurement. It is also necessary that the unit of 
measurement used to compute output have comparability within 
a department and among the various departments. 

What, then, should be the relationship between the number 
of deliveries performed by the labor and delivery personnel 
and the number of operations performed by the surgery 
department? Or, what is the relative relationship between 
the number of operations performed by the surgery department 
and the number of tests performed by the pathological 
laboratory? The results obtained from interviews with 
medical personnel indicate that there is no general 
agreement as to what constitutes a satisfactory answer to 
these questions. Because of the limitations of the patients 
served criterion discussed above, lack of comparability in 
measuring the output within a department, and lack of 
comparability in measuring the output among the various 
departments, this criterion was rejected as a possible method 
of measuring the quantity of service provided by equipment. 

The other criterion suggested as a measurement unit is 
hours of use. This criterion relates to the utilization of 
the equipment. The use of this criterion for measurement 



49 



will be evaluated from the standpoint of comparability within 
a department and among various departments. 

The use of this "time" criterion assumes that time or 
utilization is a good indicator of the quantity of output for 
a department or function and the problems associated with the 
measurement of output for a piece of equipment. For example, 
to determine the total output of a department, it would be 
necessary to evaluate and weigh the relative use of all the 
factors, such as personnel, supplies and equipment [Ref. 26]. 
On the other hand, a reasonable indicator of the output of 
equipment would be the relative use of this equipment. For 
these reasons, the "time" criterion has been selected as a 
unit for measuring the output of equipment for the analysis. 
The following discussion pertains to the implementation of 
this time criterion as a unit of mesaurement . 

An estimate should be made to determine the expected 
utilization of the proposed equipment. The following 
procedure will be followed in this study. First, it should 
be determined how long it will take to render one occasion of 
service. For example, an item of equipment for use in 
surgery might require two hours for the occasion of service. 
This two hour estimate should include clean-up time and 
preparation for the next use. It would then be theoretically 
possible to perform 12 occasions of service a day if the 
equipment were utilized 100 per cent of the time. The number 
of occasions of service that are expected to be performed a 

50 



day should then be determined. The estimated number of 
occasions of service should then be multiplied by the time 
required to perform one occasion of service in order to 
determine the total expected hours of utilization a day. The 
total expected hours of utilization will then be divided by 
24 hours in order to determine the expected percentage 
utilization a day. 

The denominator of 24 hours was chosen above because 
practically all medical center facilities are on at least a 
standby basis, for 24 hours a day. The use of a 24 hour base 
for all departments has the advantage of inter-departmental 
comparability . 

C. QUALITATIVE ASPECTS OF THE MEASUREMENT OF OUTPUT 

Considerable emphasis was placed on the qualitative 
aspect of output during the course of this analysis. The 
area was discussed thoroughly with hospital administrators 
and medical personnel in order to determine what qualitative 
factors, if any, were deemed important. In addition to this 
procedure, OPN Equipment Budget Item Justification Worksheets 
were examined. These worksheets were examined for the 
purpose of determining the justifications that were given to 
support requests for new equipment. From these studies, the 
following list of qualitative items was derived. Will the 
equipment : 



51 



1. provide capability to save patient lives that 
otherwise would not have been saved? 

2. perform a service that is not presently available? 

3. improve utilization of other hospital services that 
are already available? 

4. provide greater comfort to the patient? 

5. provide a more uniform test or service than the 
method currently in use? 

6. provide greater safety to the patient? 

7. provide greater dependability of service to the 
patient ? 

8. permit a more timely completion of service? 

9. permit a better diagnosis and evaluation of patient 
needs? 

These nine qualitative items were incorporated into a 
survey which was distributed to 35 chiefs of service on the 
Investment Equipment Review Committee at NRMC San Diego. 
Also included on the survey was the qualitative question: 
How much consideration should be given to the expected 
utilization time of the equipment? This question was 
included in the survey for the purpose of determining 
weighting relative to the qualitative factors. 

The surveys (Appendix C) were distributed with 
instructions to allocate a total of 100 points to the ten 
questions. There were no restrictions imposed and cost of 
equipment was not to be considered a factor in determining 
allocation. Interpretation of each question was left up to 
the individual completing the survey. Some of these 
different interpretations are discussed in a later section. 

Of the 35 surveys distributed to the chiefs of service, 
28 were returned. Points were then summed for each question 
of the 28 returned surveys and the results are as depicted in 



52 



Figure IV-1. For the last question on the survey, "Other 
Considerations," cost was most often cited as an additional 
criterion for investment equipment decisions. This was not 
considered relevant in the output analysis, as cost is the 
determining factor of the input analysis. As can be seen 
from Figure IV-1, questions one, two, eight and ten were 
major considerations in the new equipment decision. These 
questions relating to utilization, life-saving potential, 
dependability of service, and diagnosis and evaluation of 
patient needs gathered 1564.5 of 2800 possible total points, 
representing 55.9 per cent. No other question had as much as 
eight per cent of the total. For that reason those four are 
considered primary in the investment equipment decision and 
will be quantified in the output analysis in this study. The 
expected utilization of equipment factor was discussed under 
quantity of service. The following discussion pertains to 
the weightings to be assigned to the remaining three 
qualitative factors that were discussed above. 



Total Total 
Points Per Cent 

1. Expected utilization time of the 

equipment 358 12.8% 

2. Ability to save patient lives that 

otherwise would not have been saved 432.5 15.5% 

3. Performance of a service that is not 

presently available 193 7.0% 



53 



175 


6.3% 


129 


4.6% 


207 


7.4% 


217 


7.8% 


355 


12.7% 


206.5 


7.4% 


419 


15.0% 


108 


0*0/o 



4. Improve utilization of other hospital 
services that are already available 

5. Provide greater comfort to the patient 129 

6. Provide a more uniform test or service 
than the method currently in use 

7. Provide greater safety to the patient 

8. Provide greater dependability of 
service to the patient 

9. Permit a more timely completion of 
service 

10. Permit a better diagnosis and evalu- 
ation of patient needs 

11. Other considerations 

Total 2800 100.0% 

Figure IV-1. Results of survey for 

criterial considered in investment equipment 

expenditure decisions. 

The approach that is discussed in this study for 
assigning a range of weightings to the four primary factors 
could be applied to any of the other seven quantitative 
factors. This determination would depend upon the relative 
importance placed upon these factors by a particular NRMC or 
hospital. The illustration in this study is based on one 
quantitative and three qualitative factors because field 
survey results indicated that these indeed were the major 
considerations. 

The results of interviews with hospital administrators 
and medical personnel at NRMC San Diego concerning their 
previous commands indicate that some NRMCs consider only the 



54 



utilization factor in making equipment decisions of this 
type. On the other extreme, some of those interviewed 
indicated that greater emphasis was placed on life-saving 
potential at previous commands. One reason given for the 
different emphasis on these factors is the frequent inverse 
relationship between utilization and life-saving potential. 
This is true because in many cases equipment that will be of 
direct benfit in the saving of patient lives, such as an 
artificial kidney, will frequently have a very low 
utilization. Therefore, the acquisition of life-saving 
equipment in these instances will result in low utilization 
rates. 

The following approach was taken in determining the 
relative importance of the four factors. From review of 
maintenance records of similar equipment or equipment being 
replaced, an average utilization was determined. Then, 
consideration was given to the desired utilization level for 
these types of equipment. The actual results from the study 
could then be modified to reflect the desired usage level 
when it is different from the actual. The results derived 
from this procedure can then be stated in terms of an average 
percentage utilization for all service department equipment 
for the NRMC . This average utilization will serve as the 
basis for assigning the relative rankings. Assume that the 
NRMC has decided that a 25 per cent utilization is desirable. 
Then, if the Investment Equipment Review Committee provides 

55 



for equal emphasis on all four factors (utilization, life- 
saving potential, dependability of service, and better 
diagnosis and evaluation), the normal weighting assigned to 
these factors would be 25 per cent, 25 per cent, and 25 per 
cent, respectively. There could, of course, be any 
combination of weightings assigned to these factors. 

The normal utilization of equipment for special service 
departments varies between 15 per cent and 38 per cent, as 
determined from equipment maintenance records. The following 
comment indicated the nature of equipment utilization for 
these departments: 

. . . idle equipment is the unavoidable accompaniment of 24 
hour per day availablility of equipment whose use is 
determined by events wholly beyond the control of the 
hospital management that provides such equipment. [Ref. 
27] 

Kelly stated in his case study that utilization for these 
types of equipment varied from 14 per cent to 38 per cent 
[Ref. 28], This finding of 40 years ago is almost identical 
to the author's review of the selected equipment mentioned 
above. 

The next consideration is to analyze the life-saving 
potential factor to determine an approach for weighting the 
qualitative item. Only equipment that will be of direct 
benefit in saving lives should be given a weighting under 
this factor. Many items of equipment might have an indirect 
bearing on saving lives. For example, a new type of 
sterilization equipment might do a more effective job of 

56 



sterilization of instruments in the operating room. It could 
be argued, with some merit, that this new sterilization 
process would permit the saving of patient lives. This life- 
saving potential would be very indirect. 

It is the author's intention to include only items that 
would enable a hospital to save a patient's life that could 
not be saved by the hospital if the equipment were not 
purchased. Examples of this type of equipment would be 
cancer-treating radiation machines, artificial organs, 
pacemakers, and heart resuscitators . 

The various types of patients whose lives might be saved 
by the equipment should be determined. One type of patient 
whose life could be saved by the equipment might be one with 
a terminal illness. It might be possible to extend his or 
her life; however, he or she would undergo a great deal of 
suffering for that extended period. This situation could be 
referred to as life extension rather than life saving. 
Another possibility would be a pediatric patient. The saving 
of this life could result in the adding of 70 or more years 
to the life of a productive member of society. 

The various types of life-saving could be weighted 
differently in the analysis. Or, some types of life-saving 
potential might not be given any weighting. The following 
discussion assumes that all types of life-saving potential 
have been weighted equally. 



57 



Next, it should be determined how to weight the potential 
life-saving factor on a per-life basis. It was indicated 
earlier, for discussion purposes, that a normal utilization 
of 25 per cent had been decided upon. It was further assumed 
that the life-saving potential was given an equal weighting 
with the utilization factor. The next consideration is to 
determine how many potential lives are comparable to the 
desired utilization of 25 per cent. It is assumed for 
purposes of this discussion that a piece of equipment that 
will save five lives should be weighted equally with 
equipment that will be utilized 25 per cent of the time with 
no life-saving potential, ceteris paribus therefore, 
equipment with a life-saving potential of four lives would 
receive a weighting of 20 per cent (4/5 x .25) for the 
life-saving factor. 

The "dependability of service" factor should then be 
considered for the purpose of determining the importance of 
this factor in relation to the utilization and life-saving 
factors. The first consideration is to determine the nature 
of items which will be considered under the dependability of 
service criterion. It is intended that only equipment which 
will increase the reliability of a service currently 
available at the NRMC should be considered. For example, a 
request for a new automatic blood cell counter might be 
justified primarily because it can complete more distinct 
tests with increased accuracy than the existing system. The 

58 



assumption was made earlier that the dependability of service 
was to be weighted equally with the utilization and 
life-saving factors. Therefore, any equipment which meets the 
criterion would receive a 25 per cent weighting factor. 

The final criterion for weighting is the "better 
diagnosis and evaluation" factor. Equipment which would meet 
this criterion would be that equipment which would assist 
physicians and other medical personnel in interpretation and 
evaluation of patient needs. Any equipment which would 
result in an improvement in service of this factor would 
qualify under this criterion. For example, the proposed 
fourth-generation computed tomographic scanner purchase for 
NRMC San Diego presents a clearer, more precise picture than 
the present second-generation scanner. This improvement in 
resolution enables physicians to detect smaller 
irregularities in patient tissues and bones, and to more 
accurately locate and size tumors in pre-operative 
evaluation. This criterion differs from the greater 
dependability of service criterion in that that criterion is 
an increase in the reliability of service to the patient. 
That increased reliability is an input into the physician's 
diagnosis and evaluation of a patient. The better diagnosis 
and evaluation criterion, as illustrated by the computed 
tomographic scanner example, actually presents the physician 
with the diagnosis and evaluation. This he or she uses in 
determining a correct course of action. Again, because all 

59 



four criteria are assumed to be equally weighted, the author 
feels that equipment meeting th criterion would receive a 25 
per cent weighting factor. 

D. COMPUTATION OF THE OUTPUT RATING FOR EQUIPMENT 

For purposes of illustration, the computed tomographic 
scanner requested by the radiology department at NRMC San 
Diego will be used as an example throughout this section. 

Because the long-range objectives of NRMC San Diego did 
not specify a desired utilization rate, the author initially 
assigned 25 per cent as that figure, based on the literature 
used as references in this study. For interviews with 
hospital administrators at NRMC San Diego there was no 
disagreement with this figure, so it was retained as the 
desired utilization rate for proposed investment equipment 
items. In determining the relative weighting of the three 
qualitative factors, it was decided to weight these factors 
based upon the results of the survey (Figure IV-1). Using 
the 358 points totalled by the expected utilization criterion 
as a base, the other three criteria selected were expressed 
as a percentage of that base in Figure IV-2 . These 
percentages were then multiplied by the desired utilization 
rate of 25 per cent to obtain weightings relative to that 
figure. These figures were then rounded as indicated for 
ease of calculation. These final weightings were then applied 
to the four factors in the output formula. It was decided 

60 



that equipment which could save five or more lives, for any 
type of patient, should receive the full weighting for that 
criterion. Any less than five lives saved would receive a 
proportionate amount of that weighting. 



Total Percent- Desired Actual Weight- 
Survey age Utiliza- Weight- ing to 
Points of Base tion Rate ing be used 



25.0% 


25% 


302.0% 


30% 


24.8% 


25/o 


29.3% 


30% 



Utilization 
Rate (1) 358 100.0% .25 

Potential 
Life-Savings (2) 432.5 120.8% .25 

Greater 
dependability (8) 355 99.2% .25 

Better diagnosis 
& evaluation (10) 419 117.0% .25 

Figure IV-2. Determination of relative 
weightings for output analysis 

In Figure IV-3, the output rating for the computed 

tomographic scanner is determined. The estimated percentage 

utilization is arrived at by determining the number of 

services that could theoretically be rendered in a 24-hour 

period. An estimate is then made of the expected number of 

services that will be rendered each day. These estimates 

were obtained from equipment maintenance records and the OPN 

Equipment Budget Item Justification Worksheet. The expected 

number of services to be rendered is then divided by the 

theoretical number of services that could be rendered each 

day. (If a 100 per cent utilization is not expected to be 



61 



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62 



constant over the life of the equipment, then the percentage 
of utilization would have to be estimated for each time 
period that the rate of utilization is expected to change.) 
For this type of estimate, where expected utilization will 
not be constant over the life of the equipment, the 
percentage of utilization should be an average over the life 
of the equipment . 

The next column in Figure IV-3 provides for a 
consideration of the life-saving potential of the equipment. 
First, the number of lives the proposed equipment will save 
must be estimated. This estimate was obtained from the chief 
of service of the department submitting the request. You 
will recall from the earlier discussion of life-saving 
potential that this analysis assumes that five or more lives 
saved (over the life of the equipment) would receive a 
weighting of 30 per cent. Any less than five lives saved 
would receive a proportionate amount of the 30 per cent 
weighting factor. 

Column (4) in Figure IV-3 allows for evaluation of the 
increase of dependability criterion. If the greater 
dependability of service is a prime consideration in the 
request for an item of equipment, the first column should be 
answered yes. If this factor is not a prime consideration in 
the equipment request, the first column should be answered 
no. A no answer would indicate that no wieghting should be 
assigned to this factor. A yes answer for this factor would 

63 



mean that a weighting of 25 per cent should be assigned to 
it. 

Weighting for column (5), the better diagnosis and 
evaluation factor, is determined in much the same manner as 
column (4). If this criterion is a primary consideration in 
the equipment request then a yes answer and a weighting of 30 
per cent would be assigned. If this criterion is not a 
primary consideration, then a no answer and a weighting of 
zero would be assigned. 

The weightings assigned to each of the four factors are 
totaled in column (6). The estimated economic life is then 
determined from the OPN Equipment Budget Item Justification 
Worksheet and Enclosure (1) to Appendix A. The total hours 
available per year is 8,760 (24 hours per day 365 days per 
year). The total hours available over the estimated economic 
life of the equipment is then entered in column (8). 

Column (9) provides for the total combined output rating. 
This is computed by multiplying the total weighting assigned 
to the four factors [column (6)] by the total hours available 
over the estimated economic life of the equipment [column 
(8)]. 

One final point should be made about the weightings 
allocated to the factors in this chapter. The management of 
a NRMC or hospital could select any relative ranking of the 
four factors considered for inclusion in this output analysis 
or any of the other factors discounted earlier. It is 

64 



intended that once a method of weighting has been established 
by management, the weightings should not be changed. The 
constant weighting of these factors would permit a consistent 
use of the method of analysis. An exception to the use of 
constant weightings would be a situation where the long-range 
objectives of the facility have been changed. This situation 
would justify a reconsideration of the weightings that are 
assigned to these factors. 



65 



V. INDEX OF SERVICE FOR RANKING EQUIPMENT PROPOSALS 

A. INTRODUCTION 

In this chapter the results of the input analysis of 
equipment and output analysis of equipment discussed in 
Chapters III and IV, respectively, are combined to compute the 
index of service. The purpose of this chapter is to discuss 
the computation of the index of service, to evaluate the 
index of service and to discuss special problems associated 
with the use of this analysis and other aspects of the method 
of analysis. 

B. DETERMINATION OF THE INDEX OF SERVICE 

The index of service is computed by dividing the net cost 
(inputs) into the service rating (outputs). The result of 
the computation is the output rating per dollar of net cost 
which is referred to in this study as the index of service. 

Again referring to the computed tomographic scanner as an 
illustrative example, the index of service can be determined. 
The output rating of 31,974, which includes a relative 
weighting of the utilization, life-saving potential, greater 
dependability, and better diagnosis and evaluation factors, 
was determined in Chapter IV. The input or net cost 
computation of $1,776,696 was calculated in Chapter III and 
includes a consideration of incremental acquisition cost, 

66 



incremental operating cost, and total net outlay cost. By 
dividing the net cost into the output rating, and index of 
service of 0.018 is obtained. The use of this index for the 
ranking of requests provides the decision-maker with a 
tentative ranking of all items. 

C. EVALUATION OF THE INDEX OF SERVICE 

The author feels that the index of service can be of real 
assistance to the decision-maker. However, it is extremely 
important that the index and tentative ranking of equipment 
requests be used with a complete understanding of the 
underlying assumptions and limitations. 

The new cost from the input analysis and the output 
rating from the output analysis are the two items that are 
used to compute the index of service. The user of the index 
should be thoroughly familiar with the assumptions and 
procedures used to compute the output rating. 

One assumption was that the use of time to measure the 
utilization of equipment is a good indication of the quality 
of service that is provided. The use of this time criterion 
was justified primarily because it is a common denominator 
which can be used for comparing requests for new equipment 
within and among departments. This means that the quantity 
of service for an instrument sterilizer and an x-ray machine 
would both be measured by the item each item of equipment was 
utilized. The use of this criterion for measuring the 

67 



quantity of service does not provide for the fact that the 
utilization of the x-ray equipment for one hour might be more 
important than the use of an instrument sterilizer for one 
hour, or vice versa. It is important, therefore, that the 
user of the index of service be aware of this assumption 
underlying the measurement of the quantity of service. 

In addition to a measure of the quantity of service by 
expected utilization, the output analysis includes a weighting 
of three factors which pertain to the quality of service. 
The three items weighted are life-saving potential, greater 
dependability of service, and better diagnosis and 
evaluation. These qualitative items were weighted in 
relation to a desired level of utilization for similar types 
of equipment. The example in this chapter dealing with the 
computation of the output rating assumed that a desired 
utilization level was 25 per cent. This was the basis for 
assigning weights to the three qualitative factors which were 
weighted proportionally with utilization based on survey 
results. 

If, for example, all the proposals for a certain fiscal 
year had a utilization of about five per cent, this would 
mean that the three qualitative factors would receive a more 
favored weighting that" was originally intended in the output 
rating. Therefore, the basis for assigning weightings should 
be understood and considered by the user when soliciting 
among the various equipment requests. 

68 



In considering qualitaive items for inclusion in the 
output analysis, several factors were not included. These 
factors in total represented approximately 44 per cent of the 
total response to the survey of considerations in investment 
equipment purchases. These items should also be considered 
by the decision-maker in conjunction with the tentative 
ranking that is provided by the index of services. 

The method of analysis used in this study is applicable 
only to medical equipment proposals. Such items as galley 
equipment and floor polishers must also be purchased from 
other procurement Navy funds. To apply the index of service 
approach to these items would result in a very low index of 
service, as they would receive no weighting in the three 
qualitative factors. These items are essential and must be 
purchased at some stage. 

Several limitaions in the use of the index of service 
have been discussed in the preceding paragraphs. It is the 
opinion of the author that the index can provide a very 
useful service to hospital managers regardless of these 
limitations. The index of service provides a tentative 
ranking of equipment requests. The tentative ranking can 
give the decision-maker objective evidence to be used in 
turning down an equipment request. Without this evidence, 
the only alternative may be to approve the requests of the 
most vociferous chiefs of service. 



69 



The form for the method of analysis provides a logical 
guide for the accumulat ion of information that is relevant to 
the equipment decision. The form will, therefore, serve as a 
checklist in the completion of the equipment analysis. The 
index of service is intended to provide a preliminary basis 
for the selection of equipment requests. The ranking 
provided by the index should then be tempered by the 
judgement of the decision-maker. 

D. SPECIAL PROBLEMS ASSOCIATED WITH THE INDEX OF SERVICE 

One factor not included in the method of analysis is the 
risk associated with types of projects. It might well be 
that the probability of achieving the estimated inputs and 
outputs for an item of equipment in the labor and delivery 
department is higher than for proposed projects for the 
surgery department. This factor is not provided for in the 
analysis; however, the decision-maker should consider the 
various probabilities in the decision-making process. 

The index of service, because of its input basis of net 
cost, is biased toward lower cost equipment. This is 
necessarily so because the objective of this study was 
assumed to be the provision of equipment which would maximize 
service to patients with a limited amount of funds in the 
long run. Departments such as radiology will, in most cases, 
be made to look bad, relatively speaking, because of the 
higher costs of their equipment in relation to other 

70 



departments. Again, the decision-maker must be aware of this 
fact in the equipment proposal process. 

E . SUMMARY 

Using the input analysis and output analysis derived in 
earlier chapters, a ratio defined as the index of service was 
determined in this chapter. This index of service was then 
applied to one example in illustration. This precise 
calculation is not without assumptions or limitations, 
however. The output measure is based on relative weightings 
of factors to an assumed desired utilization. Also, several 
factors given consideration by the NRMC San Diego chiefs of 
service were not included in the output analysis because they 
did not individually constitute a significant portion of the 
survey results. Other problems associated with the index of 
service is the exclusion of risk analysis in the measurement 
of inputs and outputs, and a bias toward lower costing 
investments. Despite these apparent problems, the author 
feels that the index of service is an excellent method for 
tentative ranking of equipment proposals prior to evaluation 
by the decision-maker. 



71 



VI. RESULTS OF THE FIELD TEST OF THE METHOD OF ANALYSIS 

A. INTRODUCTION 

There were three objectives in testing the method of 
analysis which is proposed in the author's study. These 
objectives were: 

1. To determine whether it is feasible to collect the 
data required in the method of analysis; 

2. To determine whether it is necessary to make 
revisions to the method of analysis; 

3. To provide an example of how the equipment evaluation 
may be applied. 

B. EQUIPMENT ITEMS SELECTED FOR EVALUATION 

Five items of equipment were selected for the field test. 
These five items were the top five requests by the Naval 
Regional Medical Center (NRMC) San Diego in their FY 82 
investment equipment requirement letter. NRMC San Diego was 
chosen as the test site because it was found by the author in 
conversations with Bureau of Medicine and Surgery (BUMED) 
officials to have an exemplary reputation in maintenance and 
thoroughness of financial records in the capital budgeting 
area [Ref. 28]. The professional service departments 
represented in the study were radiology, outpatient 
laboratory, internal medicine (two), and cardiology. The 

72 



items requested by these departments will be briefly 
described in order beginning with the top priority. 

A computed tomographic scanner, commonly referred to as a 
cat scan, which was requested by the radiology department was 
examined. This equipment is used to present x-ray scans of 
the head and body of patients. the purchase of this 
equipment is considered essential because this machine can 
provide high resolution of subcranial abnormalities which the 
present unit is incapable of accomplishing. The processing 
time of the proposed unit is far superior to the present unit 
and is expected to alleviate the current backlog of both head 
and body scans. Finally, the age and material condition of 
the present unit have made it unreliable and it is incurring 
increasing repair costs. 

The number two priority item requested by the outpatient 
laboratory was for an automated blood cell counter. This 
unit of equipment is intended to replace an 11 year old unit 
which has become uneconomical to operate. In addition to 
performing more types of blood tests at greater speeds and 
more accurately than the older unit, the proposed unit is 
much more compact and will occupy less bench space. 

The third item, requested by the internal medicine 
department, was a gas system sterilizer. The purpose of this 
system is to sterilize therapy equipment. This system is 
considered a break-through in the field and will replace the 
present cold chemical decontamination system. The current 

73 



system does not meet accreditation standards. The command's 
Infection Study Team feels that the proposed system would 
drastically reduce non-social infection cases. 

The fourth requested item, also from the internal 
medicine department, was a portable defribilator and 
cardioscope. This equipment is used to defibrilate and 
monitor cardiac patients in emergency rooms and in transit. 
This equipment is a replacement item for an eight year old 
piece of equipment considered obsolete and unreliable. The 
addition of this proposed equipment will improve patient 
monitoring during and following cardiac arrest. 

The last piece of equipment examined in this survey was 
an electrocardiograph (ECG) cart. This piece of equipment is 
intended to be used in conjunction with the Computer Assisted 
Practice of Cardiology (CAPOC) System currently operational 
at the NRMC. Addition of the ECG cart will improve 
turnaround time of ECG analysis at branch clinics through 
interaction with the CAPOC system. 

C. RESULTS OF THE FIELD TEST 

The results of the field test are summarized in Appendix 
E. Costs supporting these computations are listed in 
Appendix D. All data was obtained from manufacturer's 
proposals, OPN Equipment Budget Item Justification 
Worksheets, equipment maintenance records and interviews with 
the applicable chiefs of service. Highlights of the cost 

74 



data accumulated for the input analysis will be discussed 
below. 

In all five examples the transportation cost was included 
in the invoice price. Installation costs are a required entry 
on the Other Procurement Navy (OPN) Equipment Budget Item 
Justification Worksheet and are calculated by a public works 
survey. 

Training costs for the computed tomographic scanner 
include all supplies and expenses used while personnel are in 
training. Training is provided by the manufacturer at his 
site. Training cost for the automated blood cell counter 
consists solely of transportation cost to and from a 
United States Navy sponsored school. 

Only the computed tomographic scanner required additional 
working capital. For the purposes of the author's analysis 
working capital will be defined as current assets [Ref. 29]. 
The additional working capital in this case is the increase 
in inventory necessitated by a second CAT scan. To calculate 
the salvage value of costs released because of this equipment 
the author used the current book value (cost minus 
accumulated depreciation) of equipment being replaced. 

Depreciation costs were determined assuming a straight- 
line rate through out the lifetime of the equipment. The 
estimated lifetime was that suggested by BUMED in Appendix A. 
Salvage value, then, was the present value of the book value 
of the equipment and working capital at some future time. The 

75 



future time used in this calculation was the applicable chief 
of service's estimate of the replacement date when factors 
such as technology improvements are considered. 

The incremental operating cost per annum was computed 
using data from the OPN Equipment Budget Item Justification 
Worksheet. Only the power cost had to be calculated by the 
author. For this figure manufacturer's estimates of power 
usage and current commercial power usage rates obtained from 
San Diego Gas and Electric Co. (SDG&E) were applied. For 
ease in comparison the incremental operating costs were 
estimated to be uniform throughout the life of all the 
equipment items examined. Other utilitites, floor space, and 
insurance were cost elements not found to play a part in the 
five items of equipment analyzed. 

The next item to be completed was the output analysis. 
Prior to conducting the analysis the author discussed the 
survey results and relative weightings assigned in Chapter IV 
with senior NRMC administrators. These officials for the 
most part found no fault with the methodology and results but 
desired to reserve their comments until the field test was 
completed. 

In determining the estimated utilization rate the author 
looked at maintenance records for similar data to determine 
the anticipated need for the equipment. Approximate 
processing time for each use was calculated from 
manufacturer's specifications and/or estimates by medical 

76 



personnel at NRMC familiar with the equipment and its 
applications. For equipment like the gas system sterilizer 
which is always in use the weighting for this utilization 
factor is easily determined. For equipment such as the 
automated blood cell counter, where operator expertise 
decides the majority of the time, this became more difficult 
and subjective. In this particular case the author used an 
average of several eatimates obtained from qualified 
biomedical technicians. 

To correctly weight the three qualitative output measures 
(life-saving potential, greater dependability of service, and 
better diagnosis and evaluation) the author depended entirely 
on the opinion of the department chief of service responsible 
for the submission of the equipment request. The criteria 
were carefully explained to these chiefs of service with 
emphasis placed on the distinction between direct and 
indirect benefits. It is the author's opinion that the 
results accurately reflect the intentions discussed in this 
analysis. Finally, the total time available over the 
lifetime of the equipment was determined by calculating the 
total hours available in the BUMED estimated equipment 
economic life in Appendix A. 

The index of service is then simply computed by dividing 
the net outlay cost derived from the input analysis into the 
output rating. The five items of equipment were ranked in 
order of the index of service and compared with their 

77 



ranking as determined by the Investment Equipment Review 
Committee (Figure VI-1). It was in this manner that they 
were presented to the NRMC administrators. 

Ranking by Index Ranking by Investment 

of Service Equipment Review Committee 

1. Portable defibrilator Computed tomographic scanner 
and cardioscope 

2. ECG cart Automated blood cell counter 

3. Gas system sterilizer Gas system sterilizer 

4. Automated blood cell Portable defibrilator and 
counter cardioscope 

5. Computed tomographic ECG cart 
scanner 

Figure VI-1. Comparative ranking of investment 
equipment items by index of service and NRMC 
San Diego Investment Equipment Review Committee 

D. COMMENTS RESULTING FROM THE FIELD TEST 

The results derived in Figure VI-1 above were presented 
to Captain C.C. Atkins, Medical Corps, USN, Director of 
Clinical Services, NRMC San Diego, and Captain S.M. 
Richardson, Medical Service Corps, USN, Director of 
Administrative Services, NRMC San Diego with a request for 
their comments and evaluations of the field test. 

Both of these administrators felt that there was a bias 
in the index of service against high cost items. This is a 
worthwhile point to consider. Theoretically, there is no 
upper limit on the net outlay cost for a piece of equipment. 
To remain competitive, were the index of service used as a 
ranking criteria, a high cost item such as the computed 
tomographic scanner would require a commensurate increase in 



78 



output rating. This is not possible because of the upper 
bounds imposed on the output measures. These limits were 
intended to reflect the objectives of the Investment 
Equipment Review Committee as evidenced by the survey 
results. If these administrators actually reflect the long- 
range objectives of the hospital more accurately than the 
survey results then the relative weightings of the factors or 
even the factors themselves can be revised. It was felt by 
the administrators that the life-saving potential of the 
computed tomographic scanner was not accurately reflected 
in the final results. 

Another comment resulting from the field test was the 
apparent disregard by the author for improvements in 
technology which reduce utilization time but increase 
efficiency and/or effectiveness. For example, the automated 
blood cell counter can provide more tests more accurately and 
in less time than the present system. All other output 
factors remaining constant this equipment would have a lower 
utilization rate, and therefore, a lower output rating than 
the less capable system now in use. This inequity could be 
repaired if the "more timely completion of service" factor 
included on the survey had received more support. Again, the 
solution is the revision of factors and factor weighting if 
that is determined to more accurately reflect the long-range 
objectives of the NRMC . 



79 



One final point was brought out during the field test 
conducted by the author. The services that are provided by 
many types of equipment that would be subjected to this 
analysis are of an experimental nature at the time the 
equipment purchase is first proposed. Physicians are usually 
reluctant to use this item after it is first acquired. 
However, as more and more medical personnel become acquainted 
with the new equipment, their optimism or pessimism generally 
spreads very quickly to other members of the staff. For this 
reason alone, projections of equipment usage will in many 
cases not be constant over the economic life of the 
equipment. Constant usage was assumed in this analysis, 
however, at the rate of expected utilization for the first 
year. This treatment of utilization was given to estimates 
because it was conservative. 

The general reaction of the personnel interviewed in 
connection with the field study was that the method of 
analysis provides a useful service to the decision-maker. 
The index of service provides a useful tentative ranking, and 
the information provided for in the method of analysis would 
be useful even if the index were not used for ranking 
purposes. It would be important for the user in this context 
to be aware of the assumptions and limitations discussed 
earlier. Another viewpoint expressed was that the equipment 
evaluation would enable the decision-maker to be objective 
with the chief of service requesting the new equipment. This 

80 



factor would assist in minimizing the affects of dominant 
personalities on the medical staff. 

E . SUMMARY 

The purpose of this chapter was to determine the 
feasibility of collecting the data necessary for computation 
of the index of service and test its applicability to the 
long-range objectives of NRMC San Diego. Five pieces of 
equipment were selected for testing the method of analysis. 
It was found that the data is indeed collectable and a 
meaningful index of service can be calculated. 

In calculating the index of service for these five pieces 
of equipment, which represented the top five requests of NRMC 
San Diego for FY 82 several assumptions had to be made. The 
most important of these were that: 

1. equipment being considered for purchase would have 
characteristics comparable to similar presently utilized 
equipment, except where noted 

2. annual operating costs would remain constant over the 
estimated equipment economic life; and 

3. utilization rate of the equipment would remain 
constant over the estimated equipment economic life. 

The findings of the field test were collated and 

presented to two senior NRMC administrators for than 

comments. In summary their comments questioned the 

application of the long-range objectives ofthe NRMC as 

determined by the author's survey of the NRMC chiefs of 

service and the apparent bias against equipment items with 

high net outlay costs. However, both of these senior 

81 



administrators and many other medical personnel interviewed 
during the course of this field test felt that this method of 
analysis could be extremely helpful in a tentative ranking of 
equipment requests, by providing the decision-maker with an 
objective basis for that ranking. 



82 



VII. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 

A . SUMMARY 

More formalized and analytical techniques are needed for 
analyzing capital expenditures for non-profit enterprises in 
general and hospitals and medical centers in particular. The 
results of a literature search by the author indicated that 
very little had been done in developing analysis techniques 
for hospitals and medical centers. What has been done is of 
such recency that evaluation of these techniques is 
impossible at this stage. The purpose of this study was to 
develop a method of analyzing proposed capital expenditures 
for purchase from Other Procurement Navy (OPN) funds at a 
Naval Regional Center (NRMC). 

An assumption of this study is that the objective of a 
NRMC is to maximize its service to patients in the long run 
with a given amount of funds. Another assumption was that 
revenue dollars could not be used as a measure of service 
provided by a hospital. Hours of use, was therefore, used to 
measure the utilization (quantity of service) of equipment. 
The research methodology for this study consisted of a 
literature search and preliminary interviews with medical 
personnel at the Bureau of Medicine and Surgery (BUMED) and 
NRMC San Diego. The results of this pilot study and ideas of 
the author were used to generate an equipment evaluation 

83 



survey intended to enumerate objectives of the Investment 
Equipment Review Committee at NRMC San Diego. This committee 
which consists of senior administrators and chiefs of service 
determines the ranking of all equipment proposals submitted 
at NRMC San Diego prior to their transmittal to BUMED for 
funding. The returns from this survey were collated and the 
objectives receiving the most support identified. These 
objectives were then quantified as measures of the NRMC ' s 
service to its patients. Finally, the completed method of 
analysis was used to evaluate five items of equipment 
proposed for purchase at NRMC San Diego. The five items 
selected were the top five priority items submitted to BUMED 
for fiscal year 1982. The purpose of this field test was to 
determine whether it is practical to collect the required 
data, to determine whether revisions should be made in the 
method, and to provide an example of the application of the 
proposed equipment evaluation in the summary. 

The method of analysis consists of three parts. These 
are the input analysis, output analysis, and index of 
service. 

The input analysis which was discussed in Chapter III is 
intended to provide the necessary information for computing 
the net investment required over the estimated economic life 
of the equipment if the equipment were purchased. This 
portion of the analysis includes the determination of 
acquisition cost, annual operating cost and net outlay cost. 

84 



The first consideration of the author was to determine 
whether to use full cost or incremental cost data in the 
input analysis. It was decided to use only incremental cost 
data in the method of analysis as this provided more relevant 
information than full cost data. It was decided that all 
cash outflows would be adjusted to the time of purchase by 
the net present value technique to reflect the time value of 
money. 

Finally, in the input analysis, the incremental 
acquisition cost is added to the time-adjusted incremental 
operating cost per annum to determine the total outlay cost. 
For purposes of this study it was assumed that all cash 
outflows occur simultaneously within a year and at the 
beginning of each year. 

There are two aspects of the output analysis discussed in 
Chapter V. They are the quantity and quality of service. 
The quantity of output refers to the volume of service 
rendered or the equipment utilization, and the quality of 
output pertains to the nature of the service that will be 
provided by the equipment. 

- The first problem encountered was to select a unit to 
measure the utilization of equipment. Hours of use was 
selected as the unit of measure for utilization. This 
criterion was selected primarily because it would provide 
comparability for the interranking of requests from all 



85 



departments. The hours of use criterion assumes that time is 
a good indication of the quantity of service. 

Considerable emphasis was placed on the qualitative 
aspects of output in this analysis. Nine factors were 
considered germane by the author for inclusion in the 
equipment evaluation summary. However, only three of these 
factors were seen by the author as receiving enough support 
to be given primary consideration in the new equipment 
decision. These three factors were: will this equipment save 
patient lives that otherwise would not have been saved; will 
this equipment provide a greater dependability of service to 
the patient, and; will this equipment provide a better 
diagnosis of patient needs. 

In order to assign weightings to the qualitative factors 
it is necessary to consider the long-range objectives of the 
NRMC. It was decided by the author that the weightings of 
these four factors would be in the same relative proportion 
as shown by their survey results. By first determining a 
desired utilization rate (percentage) for proposed equipment 
the three qualitative factors could be proportionately 
weighted. In this analysis it was determined that a 
utilization rate of 25 per cent was desirable and the 
weighting of the remaining factors was assigned 
proportionately using 25 per cent as the base. 

The total weighting determined above by summing the 
weightings of each individual factor should then be 

86 



multiplied by the total hours available over the ecomonmic 
life of the equipment to determine the output rating. For 
purposes of this study it was assumed that all equipment was 
available for use 24 hours a day. An example was presented 
in Chapter IV to illustrate the computation of the output 
rating. 

In Chapter V the determination of the index of service 
was discussed. The index of service is simply computed by 
dividing the service rating (output) by the net outlay 
cost ( inout ) . the result of this computation is the output 
rating per dollar of net cost. This index can provide the 
decision-maker with a tentative ranking of requests for new 
equipment from medical service departments. 

The results of the field test of the method of analysis 
were discussed in Chapter VI. The three objectives in 
testing the method of analysis were to detemine whether it is 
feasible to collect the data required in the method of 
analysis, to determine whether it is necessary to make 
revisions in the method of analysis and to provide an 
example in this study of how the proposed equipment 
evaluation method may be applied. Five pieces of equipment 
were evaluated and the results explained to the two most 
senior administrators at NRMC San Diego. Their comments and 
observations indicated that they questioned the weightings 
and even the factors themselves that were included in the 
output measure. This could be attributed to the lack of 

87 



knowledge of NRMC long-range objectives or possibly 
misinterpretation of survey questions. In either event this 
situation, if it does require revision, can be easily adapted 
through variation of output factors and weighting. It was 
also found by the author during the course of the field study 
that for many types of equipment usage will increase over 
the economic life. However, constant usage was assumed in 
this analysis because it led to more conservative estimates. 

The general reaction of the personnel interviewed in 
connection with the field test was that the method of 
analysis provides a useful service to the decision-maker. It 
was stated that the index of service would provide a useful 
tentative ranking, and that the information provided for in 
the the method of analysis would be useful even if the index 
were not used for ranking purposes. It would be important 
for the user of the index to be aware of the assumptions and 
limitations. Finally, the equipment evaluation would enable 
the decision-maker of the NRMC to be objective with the chief 
of service who is requesting the new equipment. This factor 
could help minimize the effect of dominant personalities on 
the Investment Equipment Review Committee. 

B. CONCLUSIONS AND RECOMMENDATIONS 

The results of this study indicate that there is a 

recognized need by personnel in hospital administration for 

techniques, such as those presented in this thesis, for 

88 



analyzing capital expenditures. Through the field test it 
was determined that the method of analysis proposed in this 
study can be used at a NRMC. It was also found that the data 
required for evaluation can be collected and that anticipated 
service from the equipment can be quantified. 

There are two distinct advantages associated with the 
method of analysis suggested in this thesis. First, the 
recommended evaluation form will provide the decision-maker 
with a logical guide for the accumulation of revelant 
information. And second, the index of service will give a 
tentative ranking for all requests for equipment of this 
type. 

It is extremely important that the user of this index 
have a thorough understanding of the underlying assumptions 
and limitations of the index of service. One assumption is 
that time is an accurate measurement of the quantity of 
service provided by equipment. With increased efficiency and 
reduced processing time of modern day equipment this 
assumption may soon no longer be valid. This assumption also 
affects the three qualitative measures of output which are 
correlated to the desired level of utilization. In addition 
to these assumptions underlying the computation of the output 
rating, there are factors which are not quantified and 
reflected in the index. These factors which were discussed 
in Chapter IV must be considered by the decision-maker in 
conjunction with the tentative ranking provided by the index 

89 



of service. Consideration of the assumptions underlying the 
computation of the output rating is necessary in order for 
the user of the index to avoid placing unwarranted emphasis 
on the results. This analysis is not intended to replace the 
judgement of the decision-maker. 

A limitation of this study is the bias of the index 
toward low investment equipment. This can be attributed to 
the fact that the weighting of the output factors is limited 
by upper bounds while the new outlay cost used to calculate 
input has no such upper bound. Again, if the NRMC 
administrators determine it is necessary and in consonance 
with the long-range objectives of the institution weightings 
of the output factors can be revised. A second limitation of 
this study is caused by the inclusion of non-medical 
equipment in the OPN budget of the NRMC. This equipment, 
such as floor polishers and food service equipment, although 
necessary, would perpetually rank low using the index of 
service method of analysis. A solution to this limitation 
would be the annual allocation of a fixed percentage of OPN 
funds for the purchase of essential non-medical equipment. 
This determination, however, would have to be made at the 
BUMED level. 

The author is of the opinion that the method of analysis 
suggested in this study will permit the user to make better- 
informed decisions. This is true even if the decisions 
resulting from the use of the recommended equipment 

90 



evaluation forms are no different than the decision that 
would have been made without the use of the method of 
analysis that is suggested in this study. 

The results of this study indicate that a need exists for 
further research into the following areas. 

1. Common measurment of services: The need exists for a 
recommended method of equating all services rendered by 
medical service departments. The problem is two fold: 

a. all services rendered within a department need to 
be measured in terms of a common denominator; and 

b. services rendered among the various departments 
should also be stated in terms of a common denominator. 
Various attempts have been made in this area, however, the 
results have not gained much acceptance and are considered 
unsatisfactory. A good common denominator, if it were 
developed, would be useful not only for the computation of 
the index of service, but for the performance measurement and 
appraisal of the various departments. 

2. Utilization of equipment: A study regarding the 
utilization experience of various NRMCs and branch hospitals 
for these types of equipment would be helpful to a hospital 
administrator in making conclusions regarding the desired 
level of utilization for these types of equipment. This 
information would permit a more scientific determination of 
weightings that are used in the computation of the output 
rating. 

91 



3. Determination of objectives: The long-range 
objective of the NRMC were viewed differently by each chief 
of service responding to the survey. The composite results 
then differed from the long-range objectives as viewed by the 
top administrators. Establishing and quantifying long-range 
objectives would eliminate the need for surveying the field 
and more accurately reflect objectives in the output rating. 

4. Probability associated with the estimates: 
Consideration should be given to the probabilities associated 
with various types of estimates. For example, estimates of 
patient need for one department may be more uncertain than 
estimates associated with another department. PERT and 
regression analysis are techniques that could be applied to 
forecast estimates of this type. 



92 



APPENDIX A 



BUMED INSTRUCTION 4235. 5G 



BUMEDINST 4235. 5G 

BUMED-43 

13 March 1979 



From: Chief, Bureau of Medicine and Surgery 



Subj: 
Ref : 



Programming of investment equipment requirements 



Encl: 



(a 
(b 

(c 

(1 
(2 

(3 
(4 
(5 
(6 

(7 

(8 

(9 

(10 

(11 

(12 



NAVCOMPT Manual, par. 074060 

Federal Register, vol. 41, No. 8, part IV, 

13 Jan 1977 

Federal Register, vol. 42, No. 6, 10 Jan 1977 

Life Expectancy of Medical Equipment Guide 
Additional Justification of Triservice Equipment 
Approval 

OPN Equipment Budget Item Justification Worksheet 
Life Cycle Cost Analysis Worksheet 
Microfilm Equipment Justification Worksheet 
Navy Word Processing Program - Systems and Equip- 
ment Request, Parts Ip II, and III 
Customer Ordering List (COL) for Diagnostic W-ray 
Systems 

Manual Report of Lease/Rental Agreements 
Investment Equipment Budget Preparation 
Investment Equipment Inventory Report 
Format for Ssbmission of Monthly OPN Status Listing 
Bibliography of Instructions Cited 



1. Purpose . To promulgate revised instructions and new 
procedures on programming of BUMED funded investment 
equipment requirements. 

2. Cancellation . BUMEDINST 4235. 5F is canceled. 

3. Scope . This instruction is applicable to all BUMED 
managed commands and shall be used for programming investment 
equipment requirements. Reference (a) defines items of 
investment equipment and basically it is any item of equip- 
ment over $3,000 with the exception of vehicles. All mess and 
galley equipment over $3,000 are to be considered investment 
equipment and will be funded, beginning FY81, with Other 
Procurement, Navy (OPN) funds. 



4. 



Background. 



The extreme competition for limited invest- 



ment equipment resources has necessitated increased emphasis 
on the investment equipment program within the Navy Medical 
Department. BUMED must be able to perform detailed analysis 
on the investment equipment as well as have sufficient data 



93 



BUMEDINST 4235. 5G 
13 March 1979 
to justify various budget requests and to generate short- 
fused, one time reports in a variety of formats. These are 
some of the reasons why detailed justifications ~ and limited 
automation of the investment equipment program are required. 
It is anticipated that more automation of the investment 
equipment program, especially in the area of the justifica- 
tion forms, will be required. 

5. Replacement Program. Each command shall develop and 
maintain a formal equipment replacement program. A minimum 
program shall include: 

a. An equipment review committee which shall meet as a 
group with the commanding officer and participate fully to 
develop the command's investment equipment budgets or addi- 
tional (emergency) requirements after the budget submission. 
The equipment review committee will establish a priority for 
each item of equipment. There shall be only one priority 
system for the entire region. X-ray and laboratory equipment 
will not have separate priority systems nor will hospitals or 
clinics regionalized under centers. The minimum composition 
of the Equipment Review Committee shall be: 

(1) Naval Regional Medical Centers/Clinics/Hospitals. 
Commanding officer, chiefs of services, a representative from 
each branch clinic, one staff CEC officer or activity CEC 
officer, and one biomedical equipment technician. 

(2) Other BUMED Managed Commands. Commanding officer, 
department heads (or equivalent), a representative from each 
branch clinic, one staff CEC officer or activity CEC officer, 
and one biomedical equipment technician or dental technician 
repairman (or equivalent). 

b. A continuing documented review of the age and 
physical condition of each item of investment equipment will 
be conducted. This action will assist in determining if an 
item should or should not be replaced. Enclosure (1) is a 
guide to use in determining the normal life expectancy of 
many items of equipment. Enclosure (1) should only be used as 
a juide since the condition and usage of the item of equip- 
ment will aid in determining if an item should be replaced. 

c. Establishment of a formal preventive maintenance 
program as detailed in BUMED Instruction 6700.36 series. 

d. Maintenance of an auditable record of investment 
equipment requirements, both replacement and new acquisi- 
tions, for: 



94 



BUMEDINST 4235. 5G 
13 March 1979 

(1) Gurrent year. The fiscal year currently in 
progress (i.e., the current year as of the date of this 
instruction is FY79) 

(2) Budget year. The fiscal year following the 
current year (i.e., FY80). 

(3) Budget Year Plus One. The fiscal year following 
the budget year (i.e., FY81). 

(4) Bsdget Year P. us two. The fiscal year plus one 
year following the budget year (i.e., FY82). 

6. Equipment Requiring Triservice Approval. Medical equip- 
ment with a unit or system cost of $100,000 or more (except 
replacement X-ray equipment $200,000 or more) must receive 
triservice review and DOD approval prior to procurement. 
Additionally, reference (b) requires all Federal agencies to 
notify the appropriate mreawide clearinghouse, Health Systems 
Agency (HSA), and State Health Planning and Development 
Agency (SHPDA) of proposed health care programs and projects 
which includes equipment acquisitions that cost more than 
$200,000. Therefore, it is required, prior to any capital 
expenditures greater than $200,000 that appropriate notifi- 
cations and request for comments be made concurrently to the 
appropriate areawide clearinghouse, HSA, and SHPDA which are 
identified in reference (c). 

a. Definitions. For the purpose of triservice review, 
unit or system cost is determined as follows: 

(1) Unit cost is the acquisition cost of the item 
plus attachments/components/accessories/ installation or 
alterations cost. 

(2) System cost is the acquisition cost of multiple 
unit cost plus attachment /components/accessories/installation 
or alteration cost (e.g., central monitoring system). 

b. In addition to other requirements in this instruc- 
tion, submission of any budget request for equipment items 
requiring triservice approval must provide the information 
indentified in enclosure (2). 

7. Equipment Requiring BUMED Approval. Reference (a) defines 
items of equipment as investment and expense items. Standard 
and nonstandard items of equipment which meet the investment 
criteria of reference (a), shall be submitted for BUMED 
approval prior to procurement by completing an original and 
one copy of enclosure (3). Local reproduction of enclosure 

95 



BUMEDINST 4235. 5J 
13 March 1979 
(3) is authorized. For those items costing $15,000 or more, 
complete the Life Cycle Cost Analysis Worksheet in the format 
of enclosure (4) and submit with enclosure (3). 

a. Requests for the following systems and equipment 
items require BUMED approval regardless of cost. Studies and 
surveys in support of systems and equipment requests shall be 
conducted independently by in-house or other Navy staff, or 
by impartial, third party study groups. Utilization of vendor 
survey teams is not recommended. Experience shows that, in 
most instances, the results, findings, and recommendations of 
such vendors 1 surveys must be considered biased. Usually, 
they are directed solely toward procurement of the particular 
manufacturer's product and therefore are not acceptable as 
valid substitutes for independent study and analysis. Submit 
studies, surveys, additional comment, and follow-on data 
directly to BUMED together with the vendor's proposal, cost 
quotation, and product brochures and specifications. Procure- 
ment action shall be initiated on receipt of technical 
approval by BUMED and shall not be effected on the basis of 
any prior authorization by higher authority. 

( 1 ) Hospital Communications Systems and Individual 
Equipment Items , including radio paging, two-way radio, 
telemetry, nurse call, audiovisual paging, intercom, etc. 
Submit all requests for radio communications and telemetry 
systems and for all individual equipment items whether for 
augmentat ion/ add-on , updating, expansion, replacement or 
other action, to OPNAV via BUMED. As prescribed by OPNAVINST 
2410. 11F radio frequency allocation (DD Form 1494) for all 
systems and individual equipment items must be authorized 
prior to procurement. Submit requests for separately wired 
intercom systems to BUMED via the local NAVFAC engineering 
field division in accordance with procedures in the 
NAVFACINST 2305.7 series. 

(2) Microfilm Equipment . Submit requests to OPNAV 
via BUMED with justification in accordance with enclosure 
(5). 

(3) Reprographic (Quick Copying and Duplicating) 
Equipment ♦ Submit all requests to BUMED. Each request must 
include the comments, authorization, and approval number 

of the local NPPS office obtained prior to submission in 
accordance with OPNAVINST 10461.8 series. 

(4 ) Word Processing (Dictation and Automated Typing) 
Systems and Individual Equipment Items . Submit all requests 
for dictation systems and individual dictation/transcription 
equipment, and for automated (shared-logic and stand alone) 

96 






BUMEDINST 4235. 5G 
13 March 1979 
typing systems and equipment directly to BUMED . Prepare all 
requests in the format of enclosure (6). BUMED will obtain 
the necessary review and approval from higher authority in 
accordance with OPNAVINST 5210.12 series. 

(5) Filing Equipment . In consonance with the 
moratorium on procurement of all filing equipment imposed by 
SECNAVINST 10463.1 series, a request for an exception is 
required. The request should include detailed information to 
enable OPNAV to review and authorize purchase. Data as to 
the number, age, and condition of present filing equipment 
should be given as well as the make and model (s) of new/ 
replacement filing equipment, the number required, purpose 
served, GSA contract number, and costs. To assure favorable 
consideration, present filing equipment should be utilized to 
the maximum extent practicable, and any excess equipment 
considered. If suitable excess equipment is not available, a 
statement should be made to this effect. 

(6 ) Automatic Data Processing Equipment including 
Data Communications Equipment . Submit requests to BUMED in 
accordance with OPNAVINST 5236.1 series and Naval Medical 
Data Services Handbook, NAVMED P-5069, regardless of appro- 
priation or method of acquisition. 

(7) Diagnostic X-Ray Systems (Less Dental) . The 
Defense Personnel Support Center (DPSC) is the procuring 
agency for all medical diagnostic X-ray systems. Enclosure 
(7), the DPSC Customer Order List (COL), contains instruc- 
tions therein for use. A technical data package must be 
included with each OPN equipment budget item justification 
worksheet for each requested diagnostic X-ray system. Upon 
delivery of X-ray systems under the COL, DPSC requires that 
the military services complete an acceptance inspection 
package for each unit. This inspection package is to insure 
that each system will perform to the specifications set forth 
by the contract and manufacturer's technical production data. 
The Inspection/ Acceptance Report may be used as a basis for 
determining warranty defects for a quality report which will 
be submitted to DPSC-AX during the warranty period. The Army 
Depots at Tracy, CA and Tobyhanna, PA have personnel trained 
in the required inspection procedures and their services may 
be obtained upon request. An interservice support agreement 
is in effect, and the procedures for use are outlined in 
BUMEDINST 6700.36 series. O&MN funding will be required to 
effect the acceptance inspection. Questions relative to the 
preparatin and use of COL may be directed to DPSC-AX autovon 
443-2896/3147. 



97 



BUMEDINST 4235. 5G 
13 March 1979 
(8) Lease or Rental of any Equipment, Material, or 

Service. Comply with the reporting requirements of enclosure 

(8). 

If any of the above items are included in budget year 
submission the provisions of this paragraph should be 
complied with at the same time in order to obtain final 
approval prior to funding. 

b. Installation expenses for investment equipment that 
are chargeable to the appropriation Other Procurement, Navy 
(OPN) must be included in the acquisition cost of the 
equipment. Guidance for these installation expenses are 
defined in NAVCOMPT 075201. Installation which requires 
structural modification/changes to utility systems, or other 
preparatory work that is accomplished by public works 
departments or through other contractual arrangement other 
than those identified in the original purchase document are 
properly charged to the command 0&M,N Appropriation. If the 
installation is not performed by the equipment supplier then 
it is not a proper charge to the OPN Appropriation. Charges 
to 0&M,N which exceed the funding authority of the local 
command shall be prepared and submitted in accordance with 
OPNAVINST 11010.20 series. 

c. Various instructions andadministrat ive regulations 
issued by other than BUMED will, at times, require submission 
of requisitions (DD Form 1149). If these items are to be 
procured with BUMED allocated funds, submit the DD-1149's to 
BUMED for processing. 

8. Preparation of Requisitions . Requisitions (DD Form 1149) 
are required only in those cases when source documents or EAM 
cards are not submitted in accordance with this instruction. 
Requisition numbers shall be constructed as prescribed by 
NAVCOMPTINST 7300.99 series for all DD-1149's, EAM cards, and 
source documents. 

9 . Sources of Supply 

a. Department of Defense Supply System . Comply with 
Naval Supply Publication 437 (MILSTRIP/MILSTRAP ) . 

b. Federal Supply Schedule Contracts . Federal supply 
schedule contracts should be utilized insofar as possible 
for the procurement of equipment not available from the 
Defense Supply System. 

c. Open Purchase. Nonstandard items not available 
through the federal Supply Schedule may be procured locally 

98 



BUMEDINST 4235. 5G 
13 March 1979 
subject to the provisions of NAVSUP Manual paragraph 22000 
and 22002. The provisions of the Defense Acquisition Reg- 
ulations (DAR)(ASPR) must be complied with in all procurement 
actions. 

10. Funding 

a. Investment equipment must be procured with funds from 
the OPN Appropriation. OPN administrative procedures will be 
announced with the allocation of funds. 

b. Research, development, test and evaluation (RDT&E) 
equipment is not presently classified as investment equipment 
and is funded from the appropriation, RDT&E. Requests for 
RDT&E equipment should comply with BUMEDINST 3900.3 series. 
Do not include these items in the investment budget. 

c. Investment equipment required by an activity within 
the Clinical Investigation Program (CIP) shall be subimtted 
in accordance with BUMEDINST 6000.4 series. Do not include 
these items in the investment equipment budget. 

d. Collateral equipment requirement for the initial 
outfitting of construction projects shall be included as a 
part of the project submission. Do not include these items 
in the investment equipment budget. Comply with the 
prerequisite actions in paragraph 7 above for all systems and 
equipment items in the project that require prior technical 
approval by BUMED . 

e. Vehicular equipment as defined in NAVCOMPT 036004 and 
civil engineering support equipment are budgeted for and 
funded by the Naval Facilities Engineering Command. Require- 
ments should be submitted in accordance with BUMEDINST 
11240.4 series. Do not include these items in the investment 
equipment budget. 

f. Materials handling equipment as defined in NAVCOMPT 
036004 is budgeted for and funded by the Ships Parts Control 
Center. Requirements should be submitted in accordance with 
SPCCINST 10490.1 series. Do not include these items in the 
investment equipment budget. 

g. While there is no prohibition against using 
appropriated funds in support of nonappropriated activities, 
complications do arise. Special services equipment which is 
"income producing" through the collection of a use of rental 
fee should be financed with nonappropriated funds. Require- 
ments of this nature should be submitted with the Operating 
Budget of Nonappropriated Funds in accordance with chapter 6 

99 



BUMEDINST 4235. 5G 
13 March 1979 

of BUPERSINST 1710.11 series. Do not include these items in 

the investment equipment budget . 

11. Annual Submission of Investment Equipment Requirements 

a. Submit by letter of transmittal to reach BUMED , not 
later than 15 June each year, an original and one copy of the 
following: 

(1) Investment Equipment Budget for the Budget year 
(see enclosure (9)). 

(2) OPN Equipment Budget Item Justification Worksheet 
for each item (see enclosure (3)). Submit original in 
priority sequence and the copy in service code sequence. 

b. Submit by letter of transmittal to reach BUMED not 
later than 15 March each year, an original and one copy of 
the following: 

(1) Investment Equipment Budget for the Budget Year 
Plus One, (see enclosure (9)). 

(2) Investment Equipment Budget for the Budget Year 
Plus Two, (see enclosure (9)). 

The letter of transmittal shall indicate the number of source 
documents or EAM cards submitted and the aggregate dollar 
value of each submission. 

12. Cancellation of Prior Year Budget Items . All unfunded 
budget items for the current fiscal year should be considered 
canceled at the time of preparing the budget year submission. 
This will insure proper prioritization of total command 
requirements . 

13 . Maintenance of Priority Investment Equipment Budget 
Listings . Investment equipment budget listings must be 
maintained in the order of command priority. Revisions 
should occur only when prior year budget items are reinstated 
or when new requirements are generated or priorities change. 
Additions or deletions to priority listings which alter item 
priorities require source documents or EAM cards for all 
items affected. Submit revisions as they occur. 

14. Interim Requirements . Requirements generated between 
the budget submissions may be submitted as the need arises, 
submitting the documentation established by enclosure (3) and 
in compliance with enclosure (9). A well planned equipment 
program will obviate the need for most addenda. 

100 



BUMEDINST 4235. 5G 
13 March 1979 

15. Investment Equipment Inventory Reporting 

a. For budget purposes and in order to comply with 
numerous reporting requirements placed on BUMED, it is 
necessary that this Bureau maintain a master inventory of 
investment equipment items held by each command. It is most 
important that this inventory remain current so that OPN 
budgeting by the commands, and reports required of BUMED, can 
reflect the true requirements of the Medical Department. 
Additionally, total dollar value of investment equipment on 
hand and its condition is one of the factors used in 
determining the allocation of funds. 

b. All items of equipment under BUMED management control 
having a unit book value of $1,000 or more must be reported 
to BUMED on a quarterly basis. (See enclosure (10)). 

c. A monthly OPN Status Listing (MED 4550-3) by FY OPN 
appropriation must be submitted in the format of enclosure 
(11) to reach BUMED no later than the 10th day of the 
following month for the month being reported. 

16. Trials and Tests . No item of equipment shall be 
accepted by the activity or by any staff member for trial or 
test without prior approval of BUMED. Requests shall be 
submitted in accordance with BUMEDINST 6700.33 series. 

17. All references listed herein contain pertinent 
information and should be reviewed prior to preparation of 
the investment budget. Mandatory compliance with all 
instructions, procedures, and formats contained herein is 
required. All budget and equipment inventories will receive 
machine edit and be returned to the command for correction 
before use by BUMED. 

18. Enclosure (12) is a listing by number and subject of all 
directives cited in this instruction. 

19 . Report /Form . The quarterly Master Investment Equipment 
Inventory Report required by paragraph 2 of enclosure (10) is 
assigned report symbol MED 4550-1. The annual report of 
Lease/Rental Agreements as required by paragraph 2 of 
enclosure (8) is assigned report symbol MED 4550-2. The 
monthly report of OPN Status Listing required by paragraph 
15c and submitted in accordance with enclosure (11) is 
assigned report symbol MED 4550-3. NAVMED 6700/3, Medical/ 
Dental Equipment Maintenance Record, is available from COG 
II, Navy Supply System under stock number S/N 0105-LF- 
226-7031. 

101 



BUMEDINST 4235. 5G 
13 March 1979 



W. P. ARENTZEN 



Distribution: 

SNDL, FH (BUMED command activities) 

Copy to: 

SNDL, A3(CNO-Op-09B15C) 

E2BCNAVAUDSVC Phila only) 

FFl(COMNAVDIST) 

(DDAS-DDOD DMO S ) 

FKM27/CL(NPPSM0) 

Stocked: 

CO, NAVPUBFORMCEN 
5801 Tabor Ave. 
Phila. , PA 19120 



102 



BUMEDINST 4235. 5G 
13 March 1979 



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103 



Enclosure (1) 



BUMEDINST 4235. 5G 
13 March 1979 





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104 



Enclosure (1) 



BUMEDINST 4235. 5G 
13 March 1979 





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105 



Enclosure (1) 






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13 March 1979 



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106 



Enclosure (1) 



BUMEDINST 4235. 5G 
13 March 1979 

ADDITIONAL JUSTIFICATION OF TRISERVICE EQUIPMENT APPROVAL 



1. Additional justifications for medical equipment requiring 
triservice approval. Provide: 

a. Equipment description including model or manufac- 
turer's number. 

b. Complete functional description of intended use of 
the proposed equipment. 

c. Description of how the function in item b above is 
presently being accomplished. 

d. Specific workload to be accomplished. List the 
procedures by type and number. 

e. Quantity and current use of similar items supporting 
the workload in item d above. 

f. Details as to any savings in time, money or personnel 
expected. Detail any increase in workload expected. 

g. Description of facility modifications required with 
cost estimates and/or other installation costs required. 

h. Number of personnel qualified to use the item and 
staffing projections. Include costs of training operators, 
if required. 

i. Statement concerning maintenance capability or 
availability. Requests for replacement of existing items 
shall include a copy of the historical maintenance record. 

j. Evidence of availability of similar equipment in 
other DOD , Federal, or civilian health care facilities. As a 
minimum the evidence must include: 

(1) Location of the other facility and its distance 
from the activity. 

(2) Cost per procedure from the other facility. 

(3) Any patient transportation, travel, or per diem 
costs. 

(4) Reasons why the other facility cannot satisfy the 
requirement . 

107 

Enclosure (2) 



BUMEDINST 4235. 5G 
13 March 1979 

(5) If the service is not available from the 
facilities, a statement to that effect is required. 

k. Written recommendations of the appropriate DOD 
Regional Review Committee. 

1. A cost /benefit analysis in the following format: 

COST /BENEFIT ANALYSIS 

1. Description (include all attachments or accessories make, 
model, and manufacturer). 

2. Workload (list types and numbers of procedures to be 
performed annually). 

3. Procurement costs: 

Unit cost $ 

Transportation 
Installation 
Facility modification 

Training 

Total fixed cost $ 

4. Life expectancy of the item or system. 

5. Annual allocation of fixed cost (total fixed costs 
divided by life expectancy). 

6. Annual operating costs (must be based on workload item 2 
above) . 

Consumable supply cost $ 
Maintenance costs 

Personnel costs * 

Total annual operating cost $ 

* Include personnel costs only if additional personnel are 
required. If personnel costs will be reduced the costs 
savings should be subtracted from operating costs. Use 
standard tables to determine personnel costs. 

7. Total annual costs (annual allocation of fixed cost plus 
total annual operating costs). 



108 Enclosure (2) 



BUMEDINST 4235. 5G 
13 March 1979 
OPN EQUIPMENT BUDGET ITEM JUSTIFICATION WORKSHEET 



FY19 



ACTIVITY SUBUNIT I.D.# 

SUBUNIT LOCATION 

Service/Division Date 



Requistion No. Priority 



SECTION I. FUNCTIONAL DATA ON EQUIPMENT ITEM REQUESTED. (To 
be completed by the requestor.) 

a. Requested item's name: (use 

generic term) 

b. Manufacturer: (Your 1st choice) 

Model : 



c. Manufacturer: (Your 2st choice) 
Model : 



d. Accessories: (Your 1st choice) 



e. Total acquisition cost, including accessories: $ 

f. Describe requested item's function. 



g. Item has characteristics and 
capabilities essentially the same as 
item being repalced. (If yes complete 
Section IV) yes no 



h. Item is mn additional item to 
provide for additional capacity 
(workload). yes no 



109 Enclosure (3) 



BUMEDINST 4235. 5G 
13 March 1979 
i. Item is replacing an item, and 
is required because of state-of-the-art 
advances. (If yes complete Section IV) yes no 



If yes, how much of the acqui- 
tion cost is the installation 
cost? 

n. What is the 0&M,N installation 
cost to install equipment? (electrical, 
plumbing, structural, medical gases, 
air conditioning, etc.) 



j. Item is requested because of a 
mission, task, or function change. yes no 

k. If h, i, or j were answered 
yes, state how this item will satisfy 
the requirements. 



1. Life expectancy. years 

If item is part of a system, 

what is the life expectancy of 

the remainder of the system? years 

m. Does acquisition cost include 

installation provided by manufacturer? yes no 



o. Does the item have any unique 

electrical or plumbing requirement? yes no 

If yes, have they been brought 

to the attention of the staff 

or a civic engineer? yes no 

p. Annual cost to provide consum- 
able supplies for equipment. $ 



q. Will mdditional personnel be 
required to operate this item, it this 
equipment is purchased? yes no_ 

If yes, then complete the following display: 



HO Enclosure (3) 



BUMEDINST 4235. 5G 
13 March 1979 
Number Corps/Civilian Speciality Grade/Rate Salary 



r. Will this item of equipment 
require personnel to receive additional 
training? yes no 

If yes, where will personnel 

receive the training and what 

is the cost? $ 



s. This item of equipment will be 
utilized in: (check one) 



outpatient service area 

inpatient service area 

both outpatient and inpatient service area 

neither outpatient nor inpatient service area 



SECTION II. WORKLOAD DATA RELATIVE TO ITEM BEING REQUESTED 

a. What will be the estimated 
workload of the item? (i.e. how many 
radiographs, lab procedures, hours 

used, patient visits etc.) year 

b. Is the population base for 
which this item will be used 
increasing, decreasing, or remaining 
stable? 



c. Will the present workload 
increase, decrease, or remain stable? 

d. What effect will this item have 
on the other services within your 
facility? 



SECTION III. MAINTENANCE AND REPAIR DATA ON EQUIPMENT ITEM 
REQUESTED. (To be completed by a biomedical equipment 
technician/dental repair technician or equivalent.) 

a. Preventive maintenance will be 
provided by: 






111 Enclosure (3) 



BUMEDINST 4235. 5G 
13 March 1979 



(1) Civilian contract 
(a) Company 



(b) Annual costs $ 



(2) In-house medical repair 

b. If preventive maintenance and 
repair services are provided by in- 
house personnel : 

(1) Will additional training of 
repair personnel be required? 

(2) Will additional repair 
personnel be required? 

(3) Will repair parts present a 
storage problem? 

(4) Will repair parts be 
readily available? 

(5) Will additional test 
equipment be required? 

If yes, describe and state 
cost : 

c. What is the length of the 
warranty period? 

d. Has patient and operator safety 
been considered? 



yes 



yes 



yes 



no 



no 



no 



yes 


no 


yes 


no 


yes 


no 


yes 


no 


$ 




months 


yes 


no 



SECTION: IV. ITEM OF EQUIPMENT BEING REPLACED DATA 
Part A. (To be completed by the requestor) 

a. Replacement item name: (use generic term) 

b. Manufacturer of item being replaced: 

c. Model of item being replaced: 

d. Plant property number: 



112 



Enclosure (3) 



BUMEDINST 4235. 5G 
13 March 1979 
Part B. (To be completed by a biomedical equipment techni- 
cian/dental repair technician or equivalent.) 

a. Acquisition cost of item being replaced: $ 

b. Age of item being replaced: years 

c. Condition code: 

d. Man-hours of preventive maintenance 

recommended per year by the manufacturer: 

e. Man-hours of preventive maintenance 

actually received per year: hours 

f. Man-hours of repairs received: hours 

g. Cost of repair parts: $ 

h. Cost of repair service if provided by 
commercial contract: $ 



i. Cost of maintenance service contract if 
provided by commercial contract: 



Proposed disposition of equipment if replaced: 



k. Attach copy of NAVMED 6700/3 of the item being replaced 

SECTION V. SPECIAL REPORTING REQUIREMENTS DATA ON ITEM BEING 
REQUESTED 

a. Is the item acquisition cost 
over $15,000? yes no 



If yes, attach a copy of the 
life cycle cost in the format 
of enclosure (4) to BUMEDINST 
4235.5 series. 

b. Is the item acquisition cost 
over $100,000? (For X-ray items over 
$200,000) yes no 



If yes, attach to this request 
the necessary information re- 
quested in enclosure (2) to 
BUMEDINST 4235.5 series. 



113 Enclosure (3) 



c. Does the requested item have an 
acquisition cost over $200,000? 

If yes, has the local Health 
System Agency been contracted 
and documents attached? 

d. Is this item a diagnostic X-ray 
system, hospital communication system, 
microfilm equipment, quick copying 
equipment, word processing (dictation 
and automatic typing) equipment, filing 
equipment, automatic data processing 
equipment, research development, test 
and evaluation equipment, clinical 
investigation equipment, vehicular 
equipment, or nonappropriated funded 
activity equipment? 

If yes, have the special requi- 
rements of BUMEDINST 4235.5 
series been submitted? 

SECTION VI. SUMMARY OF COST DATA 

a. Total acquisition cost 

b. Installation cost 
OPN 

O&M 

c. Annual cost for supplies 

d. Annual preventive maintenance k 
repair cost (if provided by commercial 
contract ) . 

e. First year's cost of additional 
training: 



BUMEDINST 4235. 5G 
13 March 1979 



yes 



no 



yes 



no 



yes 



no 



yes 



no 



3 



f. Annual cost for additional personnel: $ 

g. Cost for additional test equipment: $ 

Total Cost: $ 



114 



Enclosure (3) 



BUMEDINST 4235. 5G 
13 March 1979 
SECTION VII. REMARKS: (Provide any additional information 
which would be beneficial to support the 
requirements for this item of equipment.) 



SECTION VIII. IMPACT IF ITEM OF EQUIPMENT IS NOT PROVIDED IN 

THE FISCAL YEAR REQUESTED. (e.g. JCAH, 
patient care, etc.) 



REVIEWED BY 
GRADE : 
TITLE: 









H5 Enclosure (3) 



BUMEDINST 4235. 5G 
13 March 1979 
LIFE CYLCE COST ANALYSIS WORKSHEET 

Complete for Equipment Items or Systems Costing Over $15,000 



Requistion No. 



Priority No. 



Date 



Item of Equipment 



Manufacturer and Model No. 
FY Budgeted 



Life Expectancy (L): 
Purchase Cost (C): 
Installation Cost (I): 
Annual Cost of Supplies (S): 
Annual Maintenance Cost (M): 
Annual Labor Cost* (P): 
One Time Disposal Cost (D): 
Life Cycle Cost Formula** (LCC): 



years 



LCC = C+I+(3xL)+(MxL)+(PxL)+D = 



Calcualtions: 



(SxL) 



(MxL) 



(PxL) 



D 



* Include labor cost only if additional personnel are 
required becouse this item is purchased. This value could be 
a minus if labor savings are achieved. 

** This formula does not take into account the concept of 
present dollar of future outflows since it would not assist 
your command or this Bureau in analysis. 



116 



Enclosure (4) 



APPENDIX B 



EQUIPMENT EVALUATION FORM 



I . Input Analysis 

A. Incremental Acquisition Cost 

1. Original invoice cost 

2. Transportation cost 

3. Training cost 

4. Additional working capital 

5. Total initial outlay 

6. Less salvage values of assets released 

because of this equipment 

7. Less the present value of salvage 

value and net working capital 
released at the end of the 
equipment's economic life 

8. Incremental acquisition cost 



B. Incremental Operating Cost Per Annum* 

9. Training requirements 

10. Salaries 

11. Fringe benefits 

12. Maintenance 

13. Supplies 

14. Power 

15. Other utilities 

16. Floor space 

17. Other (specify) 

18. Incremental operating cost per annum 



3 



*• If incremental operating cost per annum are not uniform 
then they should be computed for each year separately. 



C. Computation of Net Outlay Cost 

19. Incremental acquisition cost (line 8) $ 

20. Incremental operating cost per annum (line 18) 

21. Time adjustment factor 

22. Time adjusted incremental operating 

cost for the equipment economic life 

23. Total outlay cost 

II. Output Analysis 

A. Expected Utilization of the Equipment 

24. Practical capacity upon 100 per cent 

utilization (number of occasions per 



S" 



117 






B. 



C. 



D 



E 



day if fully utilized 100 per cent 
of the time) 

25. Expected utilization (number of 

occasions of service expected to 
be utilized per day) 

26. Estimated percentage utilization 

of equipment (line 25 divided by 
line 24 times 100) 

27. Weighting assigned to this factor 

(line 26 divided by 4) 



Patient Life-Saving Potential 

28. Will this equipment save patient lives 

that otherwise would not have been saved? 

YES NO 

a. How many lives over the estimated 

life of the equipment (zero if none) 

29. Weighting assigned to this factor 

(line 27a times 6 with maximum value of 30) 



Greater Dependability of Service 

30. Will this equipment provide a greater 

dependability of service to the patient? 
YES NO 

31. Weighting assigned to this factor 

(25 if yes to line 29... zero if no 
answer to line 29) 

Better Diagnosis and Evaluation 

32. Will this equipment provide a better 

diagnosis and evaluation of patient 

needs? 

YES NO 

33. Weighting assigned to this factor 

(30 if yes answer to line 32, zero 
if no answer to line 32) 



Computation 

34. Weightin 

utiliz 
(from 

35. Weightin 

potent 

36. Weightin 

diagno 
(from 

37. Weightin 

diagno 
(from 



of Output Rating 

g assigned to expected 

at ion of the equipment 

line 27) 

g assigned to life-saving 

ial (from line 29) 

g assigned to the better 

sis of service 

line 31) 

g assigned to the better 

sis and evaluation 

line 33) 



118 



38. Combined weighting assigned to 

this equipment (sum of lines 
34, 35, 36, & 37) 

39. Total time available over the 

estimated life of the equipment 
(8760 hrs times estimated 
equipment life in years) 

40. Total output rating 

(line 38 times line 39) 

III. Computation Of Index Of Service 

41. Total outlay cost over the estimated 

life of the equipment (from line 23) 

42. Total output rating (from line 40) 

43. Index of service (line 42 divided 

by line 41) 



119 






APPENDIX C 

EQUIPMENT EVALUATION SURVEY FORM 

You have 100 pts. to allocate as you see fit to the ten 
criteria listed below. These points represent the 
relative consideration you would attach to each criteria 
when determining ranking of investment equipment. There 
is no minimum or maximum number of points that must be 
assigned to each criteria nor must all criteria be 
assigned any points at all. If you feel that some 
criteria merits consideration which is not listed please 
fill it in in question 11 with the appropriate point 
assignment . 



1. Expected utilization time of the equipment 
(quantity of service) 

2. Ability to save patient lives that otherwise 
would not have been saved 

3. Performance of a service that is not 
presently available 

4. Improve utilization of other hospital 
services that are already available 

5. Provide greater comfort to the patient 

6. Provide a more uniform test or service than 
the method currently in use 

7. Provide greater safety to the patient 

8. Provide greater dependability of service to 
the patient 

9. Permit a more timely completion of service 

10. ■ Permit a better diagnosis and evaluation of 

patient needs 

11. Other considerations (explain) 
Comments: 



pts. 



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122 



LIST OF REFERENCES 

1. U.S. Department of Health and Human Services, "National 
Health Expenditures," Social Security Bulletin , Vol. 44, 

p. 71, June 1981. 

2. U.S. Department of Health and Human Services, Social 
Security Bulletin, Annual Statistics Bulletin, 19YY-/y , 
~p~. 515~, September iy«u. 

3. U.S. Department of Health and Human Services, Statistical 
Abstract of the United States , 1980, p. 781. 

4. Hay, Leon E., Budgeting and Cost Analysis for Hospital 
Management , p. 5, Pressler, 1964. 

5. Naval Postgraduate School, Practical Comptrollership 
(PCC) Student Text, p. 29-30, Y37W. 

6. Ibid. 

7. Bureau of Medicine and Surgery Unclassified Message Date- 
Time-Group, 171555Z JUL 81, Subject: Investment Equipment 
Funded by the Other Procurement, Navy Appropriation (OPN) . 

8. Bureau of Medicine and Surgery Unclassified Letter BUMED 
3221: Serial 10918117 to Commanding Officer, Naval Regional 
Medical Center San Diego, Subject: Supplemental Fiscal Year 
1981 Investment Equipment Acquistion . 

9. LT. J.J. Swafford, Bureau of Medicine and Surgery, NM&S 
Code 464, Telephone Conversation; 04 September 1981. 

10. Ibid. 

11. CDR R.A. Potts, Naval Regional Medical Center San 
Diego, Interview; 11 September 1981. 

12. Anthony, R.N. and Herzlinger, R.E., Management Control 
in Nonprofit Organizations, p. 282-284, Ricbard D. Irwin, 
1980. 

13. Matz, Adolph and Usry , M.F., Cost Accounting Planning 
and Control , 7th ed. , p. 627-628 South-Western, 1980. 

14. Ibid. p. 724. 

15. Mottice, H.J., A Method of Analyzing Proposed 
Expenditures for Hospital Medical Equipment , p. 40, 
University Microfilms, 1964 . 



123 



16. CAPT S.M. Atkinson, Naval Regional Medical Center San 
Diego, Interview; 02 October 1981. 

17. Matz, Adolph, and Usry, M.F., Cost Accounting Planning 
and Control , 7th ed. , p. 742, South-Western, 1980. 

18. Office of Management and Budget Supplement No.l to 0MB 
Circular No. A-76, Policies for Acquiring Commercial or 
Industrial Products and Sevices Needed by the Government , 
uost comparison Handbook, March 1979. 

19. Naval Regional Medical Center San Diego, OPN Equipment 
Item Budget Justification Worksheet, Nos. 1-250, 1981. 

20. Mottice, H.J., A Method of Analyzing Proposed 
Expenditures for Hospital Medical Equipment , p. 31, 
University Microfilms, 1964. 

21. Office of Management and Budget Supplement No. 1 to 0MB 
Circular No. A-76, Policies for Acquiring Commercial or 
Industrial Products and Services Needed by the Government . 
Cost Comparison Handbook , March 1979. 

22. Bowlin, O.D., Martin, J.D., and Scott, D.F., Financial 
Analysis, p. 96, McGraw-Hill, 1980. 

23. Hay, Leon E., Budgeting and Cost Analysis for Hospital 
Management , p. 115, Pressler, 1964. 

24. Mottice, H.J., A Method of Analysis Proposed 
Expenditures for Hospital Medical Equipment, p. 65, 
University Microfilms, 1964. 

25. American Hospital Association, Uniform Chart of Accounts 
and Definitions for Hospitals , p. 31, 1979. 

26. Kelly, J.E., A Case Study of Hospital Costs , p. 182, 
Stanford University, 1941. 

27. Ibid., p. 113-121. 

28. LT J.J. Swafford, Bureau of Medicine and Surgery /NM&S 
Code 464, Telephone Conversation, 04 September 1981. 

29. Hampton, John J. Financial Decision Making; Concepts , 
Problems, and Cases, pi 76, Reston, 1979. 



124 



INITIAL DISTRIBUTION LIST 

No. Copies 

1. Defense Technical Information Center 2 
Cameron Station 

Alexandria, Virginia 22314 

2. Defense Logistics Studies Information Exchange 2 
U.S. Army Logistics Management Center 

Fort Lee, VA 23801 

3. Library, Code 0142 2 
Naval Postgraduate School 

Monterey, California 93940 

4. LCDR Robert A. Bobulinski, USN, Code 54Ld 4 
Department of Administrative Sciences 

Naval Postgraduate School 
Monterey, California 93940 

5. Assoc. Professor David R. Whipple, Code 54Wp 10 
Department of Administrative Sciences 

Naval Postgraduate School 
Monterey, California 93940 

6. Department Chairman, Code 54Js 1 
Department of Administrative Sciences 

Naval Postgraduate School 
Monterey, California 93940 

7. LCDR Martin Doyle, USN 6 
12602 McFeron Road 

Poway, California 92064 

8. Equipment and Logistics Division 1 
Code 43 

Navy Department 

Bureau of Medicine and Surgery 

23rd k E Streets 

Washington, D.C. 20390 

9. CDR Robert P. Legs, MSC , USN 1 
Naval Regional Medical Center 

Oakland, California 94627 



125 



JUL I 



8 19 



m 




Thesis 

D7214 Doyle 

c.l An analysis for capi- 
tal expenditure deci- 
sions at a Naval Region- 
al Medical Center. 



1S7PC9